Problem 223 Chargebacks Your local fast food chain with two

Problem 22-3 Chargebacks: Your local fast food chain with two dozen stores uses the company\'s internal corporate marketed department to produce signage, print ads, in-store displays, and so forth. When placing an order, store managers are assessed a chargeback (transfer price) that reduces store profitability but increases marketing department profitability. Lately, store managers have been ordering more and more marketing services; the marketing department is swamped, and it cannot afford to hire more staff. What does this indicate about the chargeback rates?

Solution

Chargeback (Transfer price):- It is the price which one division of an organisation charges for a product or service supplied to another division of the same organization. The objectives of chargeback rates are:-

i) Emphasis on Profits.

ii) Maximum utilisation of plant capacity.

iii) Optimum allocation of financial resources.

Chargeback rates provide information which will be useful for evaluating the divisional performance. It seeks to achieve goal congruence. Chargeback rates in the instant case has increased marketing department profitability which will ultimately lead to increase in the profits of company as a whole. Chargeback rates ensures that the divisional autonomy is not undermined.