The Internal Price: What Cost-Plus Costs a Group

How to read this sheet

Spare capacity is the input that decides everything and it is the one nobody updates. When the supplying unit has spindles standing, its output costs the group only what it costs to run them; when it is sold out, supplying inside means not supplying outside and the cost is the price forgone. Those are different numbers, they are both correct, and which applies changes with the season - so an internal price set once a year at a board meeting is right for part of it by accident. Read the two columns of group margin side by side before arguing about the markup. The pattern the sheet exists to show is that a price between the two is wrong in opposite directions at once: too high while there is spare, so good work is refused, and too low once there is not, so bad work is taken. Both errors are invisible in the unit accounts because each unit is behaving correctly on the numbers it has been given. The recommendation is a rule and not a number. Charge variable cost while the supplying unit has spare and the outside price once it has not, publish which regime is in force, and the receiving unit will choose what the group wants while acting entirely in its own interest. If that is administratively impossible, the sheet reports the best single price and what it still loses, so the cost of the simpler policy is at least known. What is not modelled, and some of it matters. Tax and transfer pricing regulation are ignored entirely: many jurisdictions require an arm's length internal price and will not accept variable cost, which can make the right commercial answer the wrong legal one - take advice before acting on this sheet across a border. Nothing here prices the incentive effect on the supplying unit, which under variable-cost transfer shows no margin on internal work and will lose interest in it. Capacity is treated as a single number when a mill is really a set of counts and machines, so spare on coarse counts is no help to a programme needing fine. And the outside price is taken as firm, when a mill that suddenly returns to the market with volume it was not selling will not get yesterday's price for it.