Why is it important to distinguish between up-stream and downstream sales in the analysis of intercompany profit eliminations?
In business, sales refers to exchange of goods and services for an of amount of money which is equivalent to commodity .Normally during selling, the highest bidder takes over the entire ownership of the property. The process of production of is dichotomized into two stages, that is the upstream stage of production and the downstream stage, the two terms are applicable to the production process that exist mostly in industries like the oil or metal industry thus making up the prime stages of production.
According to Owen–Smith (2005),the upstream stage of production is whereby it involves the extraction of raw materials fromtheir original state, therefore any industry that heavily relies on extraction of raw materials utilizes the upstream production, for example petroleum industry, locating the underground oil materials
On the other hand, downstream refers to production process that involves convertingthe collected materials to finished products, the stage also comprise of actual sale of the product to the consumers(Paulraj and Part, 2004). Oil industry clearly reflects the a structure that operates the downstream process because it consist of converting crude oil to other products.In general, a company that combines both processes is an integrated company
Both the processes aim at ensuring a cohesive relationship between the production firms and the buyers. The interaction further reinforcesthe structural embeddedness hence promoting effective quality and productivity of the materials. Moreover, the greater the cooperation and trust in customers, the greater the effect on concentration of the sales and operational performance hence boosts the maximization of the profit to an organization(Williamson, 1975).