Chapter 18 - Transfer Pricing Flashcards
What is transfer pricing
With divisionalisation common situation is where one division supplies goods or services to another division
Why have transfer price
The reason for having a transfer price is to be able to make each division profit accountable. If there was no transfer price than the first company would only be reporting costs and the second company would be reporting enormous profits. Additionally the problem would be compounded if the first company with sun in the same product externally as well as transferring to the second company
What is cost plus transferring pricing
A very common way in practice of the terminator transfer price is the company to have a policy that all goods are transferred of the cost to the supplying division plus a fixed percentage
What is goal congruence
If we are properly divisionalised each division manager will have autonomy over decision-making it will therefore be the decision of each manager which products are worth producing in their division. For these purposes we assume that each division has many products and therefore stopping production of one product will not be a problem.
It cost plus approach which easy to apply can lead to problems with goal congruence in that in some situations and manager may be motivated not to reduce the product which of fact is benefits for the company as a whole
How to deal with capacity limitations
Find the marginal cost (the minimum cost) and add the lost contribution From not doing the other product. For example if there was limited labour available and product X had a contribution of $20 and product y Had a contribution $30 and it took five hours to Produce eggs and 10 hours to produce y then it makes sense to only produce y because the contribution per limited source is $4 and $3. However in a divisional company wants product y we can give it to them but we first charge the marginal cost for product y ( Vari cost for product y) however as it takes 10 hours to make product y and we are losing $4 contribution per hour for x we do 10 x 4 = 40. The two combined (marginal cost and lost contribution ) is the transfer price
