A revenue and expense apportionment concept for the analysis of internal returns on investment (the simple case)
Hynes, James P.
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This paper presents a technique which uses revenue, expense, and investment data to assign returns on investment to each activity in an interactive economic system. It is a simple case of a more general model. The economic system may be a group of firms, a single firm, or a part of a firm. The technique, referred to here as revenue and expense apportionment, is particularly suited for joint cost and joint product situations such as those encountered in transportation, petrochemical production, and industrial funded activities in the Government. The principal theme of the apportionment concept is that revenues and expenses can be logically distributed among activities by using a transfer pricing mechanism so as to reveal how each segment shares in a system's overall return on investment, even when joint products are involved. The apportionment concept assigns returns to the activities involved in creating products and services; this is in contrast to approaches that distribute revenues and expenses directly to products and services. The apportionment concept is also linked to profit maximization concepts when the model of the system meets some fundamental requirements. The managerial and economic applications of the apportionment methodology include segmental investment evaluation, limited segmental performance analyses, pricing analyses and regulation. Included in this paper is a brief discussion of existing approaches, a description of the way in which a system is to be modelled in order to apply the apportionment technique, a discussion of apportionment concepts, their interpretation, numerical examples, and some economic implications. (Author)
NPS Report NumberNPS 55HJ75041
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