Cost Coordination Mechanism of New and Remanufactured Products

For firms remanufacturing their products, the total life-cycle costs and revenues from new and remanufactured products determine their profitability. In many firms, manufacturing and remanufacturing operations are carried out in different divisions. Each division is responsible for only part of the product's life cycle. Practices regarding transfer pricing across divisions vary significantly among companies, affecting the life-cycle profit performance of the product. In this research, we investigate the consequences of different types of transfer pricing approaches. In a two-period model, we analyze the profitability of different transfer pricing approaches. We determine that a cost coordination mechanism that allocates a portion of the initial production cost to each of the two stages of the product life-cycle is the most effective. We conclude with managerial recommendations concerning cost management.