Chapter 10 - Transfer pricing

Question 1

What is the transfer in transfer pricing treated as?

Answer 1

Internal sales and an internal purchase. It provides sales income to the supplying division and is a purchase cost for the receiving divisio

Question 2

What are the objectives of transfer pricing system?

Answer 2

Goal congruence
Performance measurement
Maintaining divisional autonomy
Minimising the global tax liability
Recording the movement of goods and services
Fair allocation of profits between divisions

Question 3

What is the best way of setting a transfer price?

Answer 3

Setting a price between the acceptable range of minimum price the selling division will accept and the maximum price the buying division will be willing to pay

Question 4

How do we calculate Optimum TP in a perfectly competitive market for an intermediate product?

Answer 4

Market price - any small adjustment

Question 5

How do we calculate optimum TP if the selling division has surplus capacity?

Answer 5

Marginal cost of the selling division

Question 6

What are the solutions if the marginal cost is unlikely to be fair to supplying division?

Answer 6

Two-part tariff, where transfer is accounted for in two parts:
Part 1 TP = standard variable cost
Part 2 TP = a periodic fixed charge
Cost plus pricing
Dual pricing

Question 7

How do we calculate optimum TP if selling division does not have surplus capacity?

Answer 7

Marginal cost of selling division + lost contribution

Question 8

What will a multination company try to minimise?

Answer 8

The groups total tax liability