Analysis of the Opening of International Distribution Centers Based on Transfer Prices
Abstract
Two mathematical models to analyze the impact of locating new global distribution centers for a company that originally exports its products directly to its
customers are presented. The models consider transfer pricing and inventory costs, which causes the models to be nonlinear. The solution method includes the linearization of the product between the transfer prices and the product flow variables and the application of an iterative procedure to obtain consistent
inventory costs. The results show that under most assumptions considered, it is profitable to open international distribution centers. Several sensitivity analyses, such as the impact of the variation of transfer price bounds, corporate income tax rate, and duties, are also presented.
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References
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