Learning Unit - Transfer pricing

Question 1

What is transfer pricing?

Answer 1

A transfer price is the price at which goods or services are transferred between different units of the same organization

Question 2

What is decentralized management control?

Answer 2

Decision making responsibility is to some extent delegated to unit managers.

Question 3

When may an organization’s central management wish to intervene regarding transfer pricing negotiations.

Answer 3

1. Negotiations that cause undesirable levels of conflict or unacceptable outcomes.
2. If there is too much conflict between divisions.

Question 4

Provide 5 characteristics of a divisionalised organization structure.

Answer 4

1. There are separate divisions or “units/departments”.
2. Each unit has its own distinct product(s) or services or situated in a different geographical area.
3. There is a head office and various departments/cost centers below the head office.
4. Autonomy exists in the Divisions to a large extent.
5. Some profit responsibility exists in the divisions.

Question 5

Provide the formula for calculating the minimum transfer price per unit.

Answer 5

Minimum transfer price per unit (MTPU) = (Total incremental costs of all kilograms to be transferred + Total incremental opportunity cost from external sales forfeited) / Total number of kilograms to be transferred