Question: 6 China petroleum & Chemical corporation (“Sinopec”) is an integrated energy and chemical company including Exploration and Production refining segments. In January 2000, Sinopec revised its crude oil transfer pricing policy to align the prices for internal sales with those for external sale of similar grades. Table 6.1 reports prices and sales volumes for Sinopec’s Exploration and Production segment.

Compare the prices and sales volumes for inter-segment and external sales before and after the policy change.

(A) Suppose that Sinopec’s Exploration and Production segment had been maximizing its segment profit. Comment on your findings in (a).

(B) Suppose that instead that the Exploration and Production segment had been directed to meet the requirements of the refining segment before selling externally. What are the shortcomings of such a policy?

(C) Explain how Sinopec should decentralize inter-segment sales.