Ch 9 v2: transfer pricing Flashcards
what is transfer pricing
transferring. agood to another segment of the companya dn not in the free market (could save money for the parent ocmpany)
general transfer price formula- seller
min transfer price (seller) = vc/unit on inteernal transfer + lost cm/unit on external sales
its variable cost per unit + the (sales-vc) externally
max tp (buyer)
max transfer price buyer:
lesser of
a) market purchase price
b) selling price of the final product-costs incurred to finish product
no excess capacity for selling division? (as in everything is being sold in the market)
sell at market price!!!
company is indifferent to transferring or buying externally
and in the formula the opportuniity cost is high because the company would earn more revenue at market price
excess capaicty?
the opportunity cost is 0 because they are not getting a better price in the marekt (sales not happening)
how to make the data for the transfer pricin for compapny
revenue of company
variable cost product 1
variable cost product 2
Cm/unit
negotiatied transfer prcie
when # units transferred internally is not the sme as # units that must be foregone
negotiated transfer pricing minimum TP
VC/unit on internal transfer
+
Total lost cm on external sales/# units transferred internally
alternatives to the general TP rule
cost based tp (standard or actual costs)
market based tp
cost based tp (Standard or actual)
= VC
= Absorption/Full Cost
= Absorption/Full Cost + Mark Up
Market Based TP
= market price-selling and deliver expenses
= Problem: may not always have market for intermediate product
TP and taxes
MNC use TP to min overall taxes
SCENARIO: Div A= low tax; Div B= high tax
If div A is seller and div B is buyer; TP as high as possible
If Div B is seller and Div A is buyer; TP as low as possible
performance measures
ROI
Residual Income
ROI
operating income/Avg Operating Assets
ROI other formulas
Income/Revenue x Revenue/Investment
(Profit margin, sales margin, or return on sales) × (Capital or Investment Turnover);
ROI may result in Goal Incongruence
RI residual income
income - (investment x imputed interest rate)
imputer rate= min rate of return/ cost of capital
RI SHOULD NOT BE USED TO COMPARE DIVS OF DIFF SIZES
But why is RI good?
can solve the issue of. goal incongruence@@
If the manager is evaluated based on RI rather than ROI, the interests of the manager and company become aligned as both are incentivized to take on the new project.
Gross Book Value vs Net Book Value(not in textbook)
NBV is consistent with external reporting standards but is misleading and there is less incentive for managers to replace old equipment when necessary.
depreectiaiton and NBV/GBV
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