Accession Number : ADA305276

Title :   On the Use of Transfer Prices Within DoD: The Case of Repair and Maintenance of Depot-Level Reparables by the Air Force.

Descriptive Note : Final rept.,

Corporate Author : LOGISTICS MANAGEMENT INST MCLEAN VA

Personal Author(s) : Rogerson, William P.

PDF Url : ADA305276

Report Date : MAR 1995

Pagination or Media Count : 43

Abstract : Each year, approximately $81 billion of supply and logistics services are bought and sold in internal Department of Defense (DoD) markets. Supply and logistics agencies within DoD are generally run as self-supporting business units. They sell their goods and services to DoD customers and charge prices that allow them to break even. Setting prices according to the break-even principle creates a "neat and tidy" funding system for supply and logistics organizations. However, it is inconsistent with the primary role that transfer prices are supposed to play in an organization. This is encouraging users of internally supplied inputs to make efficient decisions by making them aware of and responsible for the cost of producing these inputs. In order to accomplish this function, transfer prices must be set equal to marginal cost pricing. Incorrect pricing results in significant inefficiencies in resource allocation decisions. This paper considers the case of repair and maintenance of aircraft components by the Air Force. It provides a specific and detailed analysis of pricing errors in this system, the distortions in decision-making that these errors induce, and specific detailed recommendations for fixing these errors. More generally, it provides an illustration of the types of pricing errors occurring throughout DoD's internal markets for supply and logistics services, and how these could be corrected.

Descriptors :   *LOGISTICS SUPPORT, *REPAIR, *SUPPLY DEPOTS, SETTING(ADJUSTING), AIR FORCE, DEPARTMENT OF DEFENSE, COMMERCE, ORGANIZATIONS, MARKETING, DECISION MAKING, DEFENSE SYSTEMS, COST ANALYSIS, COSTS, INTERNAL, ERRORS, ALLOCATIONS, AIRCRAFT EQUIPMENT, RESOURCE MANAGEMENT, TRANSFER, MAINTENANCE EQUIPMENT, SELF SUPPORTING STRUCTURES.

Subject Categories : Logistics, Military Facilities and Supplies

Distribution Statement : APPROVED FOR PUBLIC RELEASE