Salers Dairy Products

"We could revisit the cream issue but I'm not sure it's worth the trouble. The Spaniards will never accept the deal?" Manuel Da Silva, sales manager of the Portuguese division of Salers Dairy Products, said these words at a meeting held in January 2013 at the factory in Fundão, a beautiful town located in eastern Portugal. That morning, Paulo Moreira (the CEO of the Portuguese division) and the rest of the Fundão factory's top management team were brainstorming to find ways to improve the declining profitability of the Portuguese division and navigate the deep economic crisis that Europe (particularly Portugal) was undergoing. The "cream issue" was the way the Portuguese executives colloquially referred to the possibility of selling surplus cream - a by-product of yogurt production - to the Soto factory of the Spanish division. Currently, the surplus cream was sold to external clients. The case provides a practical setting to illustrate how transfer pricing policies can help create goal congruence between divisional managers and the company's general interest. The business situation described in the case could also lead to other interesting discussion points, most notably the trade-offs between the different types of transfer pricing policies, such as market-based transfer pricing, cost-based transfer pricing and negotiated transfer pricing.