Introduction to Internal Pricing

What you will learn to do: understand internal pricing and production issues

Car hub capsGeneral Motors (GM) is one of the world’s largest auto manufacturers, making and selling cars and trucks worldwide. GM North America and GM International handle the automotive end of the business while General Motors Financial Co. provides financing services. The automotive divisions produce cars and trucks under a variety of brands such as Buick, Cadillac, Chevrolet, and GMC. Within those divisions and segments, we can assume that parts are transferred from one department to another and that some parts, like tires, are purchased from outside parties, some of which might not even be U.S. companies.

In fact, the United States Department of Transportation, in enforcing the American Automobile Labeling Act, reports how “domestic” every car is by measuring the percentage of each vehicle’s parts and manufacturing that comes from either the United States or Canada. According to that measure, the two most “American” cars are both Hondas—the Odyssey minivan and Ridgeline pickup—with three-quarters of each vehicle’s components made in the United States or Canada. The highest-ranked car made by a Detroit automaker is the Chevrolet Corvette, which placed seventh. About two-thirds of its parts and manufacturing are from the United States or Canada. The only automaker that builds all its American cars at a US plant is Tesla, but even Tesla imports roughly half the parts it uses.

Why do companies outsource, and how do they decide what parts, components, and services to outsource?

When a company has divisions that “sell” to other divisions within the company, how do they determine the transfer price?

Why do some companies use firms like ADP to process payroll and others use an internal payroll department?

How do companies determine when a product is ready to sell, and what form that product should take?

In the upcoming readings, we’ll use differential analysis to tackle these kinds of internal business decisions.

When you are done with this section, you will be able to:

  • Compare and contrast transfer pricing options
  • Describe the costs and benefits of outsourcing
  • Determine the selling point in the manufacturing process

Learning Activities

The learning activities for this section include the following:

  • Reading: Transfer Pricing
  • Self Check: Transfer Pricing
  • Reading: Outsourcing
  • Self Check: Outsourcing
  • Reading: Sell or Process Further
  • Self Check: Sell or Process Further