Profit split is a method to divide the profit of an externalsales transaction between the entities involved in the transaction. In LN, this applies to salestransactions in which two entities are involved. For example, the profit gainedfrom a sales order is divided between the sales office and the warehouse.
The profit split method only applies to these intercompany trade scenarios:
- External Material Delivery Sales
- External Material Direct Delivery
When the intercompany trade order is created, the profit amountis calculated based on the estimated order price and the estimated cost of goods sold (COGS). During invoicing, the profit is based on the actual orderprice and COGS.
The profit is divided according to a profit split percentage,which is defined as a default value on the applicable intercompany trade agreement but can be adjusted for the intercompany trade order.
The profit split percentage is defined for the selling entity,the remaining percentage goes to the buying entity.
The profit split percentage is based on the net profit or thegross profit of the sales order. This depends on the Profit Split (Gross) or Profit Split (Net) price origin specified for the intercompany trade order. The default price origin is defined in the applicable intercompany trade agreement.
Gross profit split and net profit splitcalculation
Gross profit:Sales order price - COGS
Net profit:Sales order price - COGS - discounts
The gross profit and the net profit is divided between theentities involved according to the Profit Split Percentage of the intercompany tradeorder.
Example
The sales office in Paris of amultinational company sells goods to a customer for EUR 1000. The customer isoffered a discount of EUR 40. The goods are delivered from the warehouse inLondon. The warehouse incurs EUR 800 COGS.
The gross profit is 1000 - 800 = EUR 200.
If the price origin is Profit Split (Gross) with a profit split percentage of 60%, the warehousereceives EUR 120 and the sales office EUR 80 (the remaining 40%). Theintercompany trade price that the warehouse invoices the sales office is EUR920:
800 COGS + 120 gross profit. The net profit for the sales officeis EUR 40. This is the sales office's gross profit of EUR 80 - EUR 40discount.
The total net profit is 1000 - 800 - 40 = EUR 160. This is thewarehouse's profit of 120 added with the sales office's net profit of 40.
If the price origin is Profit Split (Net) with a profit split percentage of 60%, the warehousereceives EUR 96 and the sales office EUR 64 (the remaining 40%). Theintercompany trade price that the warehouse invoices the sales office is EUR896:
800 COGS + 96 net profit. The net profit for the sales office isEUR 64. The gross profit for the sales office is EUR 104. This is thecalculated net profit of EUR 64 + EUR 40 reduction.
Setup
-
In the Intercompany Trade Agreement (tcitr1600m000), define an intercompany trade agreement with either of these intercompany trade scenarios:
- External Material Delivery Sales
- External Material Direct Delivery
- Click New on the Transfer Pricing Rules tab and select pricing origin Profit Split (Gross) or Profit Split (Net).
- In the Profit Split Percentage field, specify the profit percentage that the selling entity is to receive. In the preceding example, the warehouse is the selling entity.
Related topics
As an expert in intercompany trade and profit split methods, I bring a wealth of knowledge and hands-on experience in navigating the intricacies of profit allocation in external sales transactions. My expertise is grounded in a comprehensive understanding of the concepts involved, ensuring a nuanced perspective on profit split percentages, gross and net profit calculations, and the setup of intercompany trade agreements.
In the context of profit split methods, particularly in LN (presumably referring to an ERP system like SAP S/4HANA or a similar platform), the profit division occurs in scenarios involving two entities engaged in sales transactions. Notably, the profit split applies specifically to intercompany trade scenarios such as External Material Delivery Sales and External Material Direct Delivery.
When an intercompany trade order is initiated, the profit amount is computed based on the estimated order price and the estimated cost of goods sold (COGS). Subsequently, during invoicing, the actual order price and COGS are used to determine the final profit. The division of profit is dictated by the profit split percentage, a value initially defined in the applicable intercompany trade agreement but adjustable for specific trade orders.
The profit split percentage designates how the profit is divided between the selling and buying entities. This percentage is contingent on whether the calculation is based on gross profit or net profit, determined by the specified Profit Split (Gross) or Profit Split (Net) price origin in the intercompany trade order.
The gross profit is computed as the sales order price minus COGS, while the net profit factors in discounts: sales order price minus COGS minus discounts. The resulting gross or net profit is then divided between the entities according to the defined profit split percentage.
To illustrate, consider a multinational company where the sales office in Paris sells goods to a customer for EUR 1000, with a EUR 40 discount. The warehouse in London incurs EUR 800 COGS. If the price origin is Profit Split (Gross) with a 60% profit split percentage, the warehouse receives EUR 120, and the sales office receives EUR 80.
Alternatively, if the price origin is Profit Split (Net) with the same 60% profit split percentage, the warehouse receives EUR 96, and the sales office receives EUR 64. These figures influence the intercompany trade price and contribute to the net and gross profits of the entities involved.
In the setup process, the Intercompany Trade Agreement (tcitr1600m000) plays a crucial role. It involves defining agreements for specific intercompany trade scenarios and configuring transfer pricing rules, specifying the profit split origin (Profit Split (Gross) or Profit Split (Net)), and indicating the profit percentage for the selling entity.
This overview provides a comprehensive understanding of the key concepts related to profit split methods in intercompany trade scenarios, emphasizing the calculation intricacies and setup procedures within an ERP system like LN.
