lECTURE 2.3 - Transfer Pricing

Question 1

When are transfer prices needed

Answer 1

When an organisation has multiple departments or divisions

Question 2

Transfer pricing problems

Answer 2

A set of transfer prices that maximise a firms profits may lead to divisions operating at a loss

Affecting motivation of managers

They then make sub optimal decisions which reduce organisational profit

Question 3

3 methods to set transfer prices

Answer 3

Cost based
Market based
Negotiated

Question 4

Cost based full cost

Answer 4

Widely used because product decisions are LR
Enables supplying division to recover full cost of production

Question 5

Cost based cost plus mark up

Answer 5

Attempts to meet performance evaluation of transfer pricing
But enormous mark ups can result with goods being at a price that is uncompetitive

Question 6

Market based

Answer 6

Requires a market for intermediate product assuming supply division can sell
Based on listed price of an identical or similar product

Question 7

Market based limitations

Answer 7

Market imperfections will impact decisions and profits
Often no appropriate price for an incomplete product
Supplying division will incur additional costs when selling externally

Question 8

Negotiated

Answer 8

Most appropriate where there are market imperfections and managers have equal bargaining power
Managers must understand cost and revenue implications helping to resolve conflicts

Question 9

Negotiated limitations

Answer 9

Can lead to sub optimal decisions
Time consuming
Affected by the bargaining skills and power of managers
May cause conflict rather than resolve