TRANSFER PRICING FOR THE MULTINATIONAL CORPORATION: A MATHEMATICAL PROGRAMMING APPROACH AND A CASE STUDY

The purposes of this study were (1)to develop a mathematical model for determining transfer prices and resource allocation in a profit-maximizing multinational firm, considering the critical environmental variables--especially taxes and duties--which directly affect the setting of transfer prices in the international context; and (2)to evaluate and test the applicability of the proposed model as a means of determining optimal transfer prices in an actual multinational firm.;The problems of transfer pricing and resource allocation for the subject firm were solved on an AMDAHL 360/370 computer system. IBM Mathematical Programming System Extended/370 (MPSX/370) available at the University of Missouri-Columbia Computer Center was utilized during this study. Five computer runs have been made to test the sensitivity and realism of the model, and representatives of the subject firm have showed satisfaction with the application results.;By applying the model to the subject multinational firm, the total net profit has increased by 4.74 percent as a result of a permitted variation in the transfer prices of (+OR-)15 percent compared to the transfer prices actually used. This indicates that the total net profits seem to be very sensitive to the permitted range in transfer prices variation. However, since a small percentage increase in net profits for a multinational firm might be a substantial amount, the mathematical approach formulated in this study seems promising and should, in many cases, be well worth implementing.;In accordance with these objectives, Chapter III develops the multinational transfer pricing model. In this model the transfer pricing problem was analyzed by a linear and non-linear programming approach. This approach has the advantage of considering the transfer prices as well as the resource allocation as decision variables in order to maximize the multinational firm's overall net profits through optimal transfer pricing decisions. In order to test the applicability of the general model, it has been applied to an actual multinational firm. The principal advantage of the application was to enable this study to analyze and compare the results of the model with actual transfer pricing decisions made in the real world and to investigate how well decisions can be improved by implementing the mathematical approach.