A.S Bryden: A market and company analysis and transfer pricing

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Brief History of AS Brydens

A.S Bryden and sons was founded in Barbados in 1898 by Arthur Sidney Brydens. However, the Trinidad office began operations in October 1923, which was governed by Arthurs’s son William Francis Bryden. Today it is one of the most successful businesses of its kind in Trinidad.

A.S Bryden and sons (Trinidad) Ltd. has been established as one of the Trinidad’s number one distributors of internationally owned brands. The Brydens Group conduct activities in a wide variety of industries presently in Trinidad. However, A.S Bryden is entirely focused on the distribution of a broad variety of consumer goods that are high in demand. Their line of products are separated into three groups governed by three competent sales teams, these groups are Food and Grocery, Hardware and House wares and Premium Beverages. They are able to manage and distribute these products with the utilization of a very modern Warehousing and Distribution Centre.

Line of Products

A.S Bryden and Sons Limited distribute a range of international and local goods categorized into food and grocery, hardware and house ware and premium beverages. They are the distributor of Angel parboiled rice, Grace line of products and Tang drinks. In the hardware section Bryden distributes high quality brands such as Stanley, Black and Decker and Sthil. Brands in the houseware section include Lasko, Brita Oster and Rubbermaid. The premium beverages are further classified into spirits, wines and non-alcoholic. Spirits include Belvedere Vodka, Black and White and Ciroc and many more. Franzia, Ricasoli and Black Tower are among the other brands of wine they are responsible for distributing. Finally, they distribute the following non-alcoholic drinks, Fiji water, Finest Call cocktail mixes and Red Bull.

The Type of Market that AS Brydens Operates.

A.S Bryden operates in the Caribbean region, where it is located in the following countries such as, Guyana, Barbados and Trinidad. It competes in a highly competitive market where there are major wholesalers such as Unilever who may propose a threat to them.

It operates in a Business to Business market in which a wholesaler to retailer relationship exists with A.S Bryden being one of the largest and most diverse wholesale distributors in Trinidad.

Analysis and Findings.

The decentralization of corporate operations has been accompanied by utilization of the profit centre concept to measure, assess, and motivate divisional management. As the implications of the profit centre idea have been acknowledged, there was a need for a coherent system to price the intra-company transfer of goods. The aim, overall, was to formulate methods which would satisfy the goals of divisional managers to earn suitable profit for their divisions, while simultaneously furthering corporate profit goals. The concept of transfer pricing was devised to achieve these goals. A transfer price is the price paid by one division for a company to another for the exchange of goods and services, i.e. one division acting as a buyer and the other as a seller.

Currently there are several methods of transfer pricing available to companies, they include:

  • Market based transfer pricing
  • Cost plus
  • Marginal
  • Negotiated

At The Brydens Group of Companies the Negotiated method of transfer pricing is utilized for the pricing of the Redbull energy drink which is transferred from A.S Bryden (selling division) to Bryden Pi (buying division) with A.S Bryden is the exclusive importer and distributor for the energy drink. The negotiated transfer price resulted from discussions between the selling and buying divisions.

Generally, the selling division will agree to transfer only if the profits of the selling division increases as a result of the transfer, and the buying division will agree to the transfer to the transfer only if the profits of the buying division also increase as a result of the transfer. This may seem obvious, but it is an important point.

For instance, if the transfer price is below the selling division’s cost, a loss will occur on the transaction and the selling division will refuse to agree to the transfer. Likewise, if the transfer price is set too high, it will be impossible for the buying division to make any profit on the transferred item thus deterring such a venture.

The responsibility of setting transfer prices at The Brydens’ Group lies solely in that of the buying and selling division managers and subsequent approval by the CFO of each company.

The premium beverage division of A.S Bryden sells the Redbull energy drink to the consumer division of Bryden Pi at a negotiated price, at a 10% mark-up plus cost, while the market price is 20% mark-up plus cost. In theory this method may be misinterpreted as the cost plus method however in reality it is the negotiated method since both divisions (buying and selling) have agreed to the final price.

In determining an appropriate transfer price both divisions take the following factors into consideration:

  • Quantity being purchased
  • Revenue Generation
  • External Market Price
  • Opportunity Cost
  • Buying Division’s highest acceptable transfer price
  • Selling Division’s lowest acceptable transfer price

To elaborate, the quantity being purchased is taken into consideration since the amount of the purchase could either be material or immaterial, the ability of the transaction to contribute to revenue was also important since the units are both profit centres and would want to contribute to their profit margin tremendously.

The external market price is also taken into consideration as to ensure that the units are operating not just competitively but also efficiently. Moreover the opportunity cost is important to determining the transfer price for the energy drink as to ensure that the decision to transact internally does not diminish alternative opportunities that might create greater wealth for the units and the group as a whole if they are pursued. The highest and lowest acceptable transfer price by both buying and selling division respectively is given attention so as to ensure an the price is not too high or too low so as to distort revenue, profits or the viability of either unit.

Generally, with transfer pricing many companies are faced with numerous implications. These implications can have varying effects. With regards to A.S Bryden and Bryden Pi one of the major implications which arise in intercompany transactions is the issue of loss of profits on the part of A.S Bryden. This occurs when A.S Bryden sells to the external market a 20% profit is made, whilst sales to their sister company result in only 10% profits. The rational for this is an attempt by The Brydens’ Group of Companies to increase their market share with regards to energy drink and to also expand the line of products distributed by Briden Pi.

Whilst from an accounting viewpoint it seems as a substantial loss in terms of a 10% decrease in potential profits (i.e. 20% as appose to 10%) the benefit derived from such a transaction far outweighs the cost since the company is able to gain wider exposure to the market and reap greater future profits in the long run. The Group is able to penetrate the market and increase market-share since each company has distinctive accounts than the other which allows them to bank upon their client relationship in marketing and exposing the Redbull brand.

Conclusion

The Brydens Group uses transfer pricing to price the Redbull drink which is transferred between A.S Brydens and Bryden Pi. The transfer pricing method used is the negotiated transfer pricing method. The prices are set by the divisional managers of both divisions. The main purpose for the use of transfer pricing at the Brydens group is to market the Redbull energy drink in the energy drink market. In conducting such a intercompany sales, a ten percent (10%) potential profit is lost.

Recommendations

  1. Create a transfer Pricing Team.

By implementing a transfer pricing team not only can they combat some disadvantages of transfer pricing but the team itself would be made up of individuals who have the skills, experience and tools necessary to boost business change to deliver the greatest overall commercial and tax benefits to an organisation.

The main disadvantages of Transfer Pricing are:

  • Lack of goal congruence among managers in different parts of the organization.
  • Insufficient information available to top management; increased costs of obtaining detailed information.
  • Lack of coordination among managers in different parts of the organization.

A transfer pricing team would unite not only experienced individuals but also the managers involved in the transfer pricing process. By uniting the managers in one team can have a beneficiary effect of the creation of goal congruence as, despite the relations between the managers, the team would have goals set to achieve. The team will now have the responsibility of providing information to top management without increasing costs exponentially. Finally by having a transfer pricing team has a high chance of increasing coordination among managers in different parts of the organization as they would have chance to meet and interact as a part of the team.

  1. Review the transfer Price on a yearly basis.

A.S Bryden does not do any review on their Transfer Pricing sales for the year? It is essential that a group’s internal transfer pricing policies are reviewed regularly and, if necessary, amended every time there is a significant event within the group (acquisition/disposal/restructuring) or within the industry. Transfer pricing documentation is required to be fact-specific, and therefore, transfer pricing documentation reports must be crafted based on the specificity of the intercompany transaction(s) being reviewed. The advantages of reviewing the Transfer price on a yearly basis are to select the most appropriate transfer price, to conduct benchmarking and financial analyses.

Exploring the Option of the Cost Based Method.

We suggest that Brydens should explore the option of the Cost Based method. This method usually determines its transfer price based on a number of methods, for example the full cost, Cost- Plus, Variable Cost Plus lump sum charge, Variable Cost Plus opportunity charge and Dual Transfer price. Using Full costing method allows Brydens to arrive at a transfer Price that is a satisfactory approximation of what the market price would be like without actually using a market price method in order for them to maintain their policy of being branded as the only carriers of the brand. The utilization of this method assures the firm that the price fixed will fully cover cost. This method also reduces the chances of disputes that may take place between the both parties taking part in the negotiation. The negotiated transfer price, may sometimes not be a reflection of an appropriate transfer price for the company to make an adequate amount of profits, but may depend on which of the parties involved in the negotiation that possesses better negotiating skills.

Challenges Faced in Project Development and Execution

In carrying out the project we (Group 10) had been faced with many challenges. Given the sensitivity of the topic of Transfer Pricing it was very difficult to not just get a company that would avail itself to assist us but also in answer the questions that were substantial to the report as a whole. Apart from the challenges faced we are grateful to The Brydens Group for facilitating us when our previous potential companies of choice did not pull through. We have also compiled this report given the limited information that was disclosed to us in the strictest of confidentiality.

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