Lecture 7

Question 1

When will a company use market based transfer prices?

Answer 1

When the market is perfectly competitive, i.e. when the products are identical.

Question 2

What is market-based transfer pricing

Answer 2

Pricing that reflects current market rates for comparable goods.

Question 3

3 advantages of market based transfer prices

Answer 3

Reflects external market conditions. Easy to justify externally. Helps for performance evaluation.

Question 4

3 disadvantages of market based transfer prices

Answer 4

Doesn’t work if there is no active external market. External market prices can fluctuate, leading to instability. Doesn’t consider internal costs or margins of divisions.

Question 5

How are cost plus a markup transfer prices calculated?

Answer 5

Calculated by adding a predetermined profit percentage to the production cost

Question 6

What is a consideration of using cost plus a markup for transfer costing?

Answer 6

The markup percentage must be justifiable and in line with company standards.

Question 7

3 advantages for using cost plus markup method for transfer pricing

Answer 7

Ensures coverage of costs and provides a profit margin. Simple to calculate. Easily explained.

Question 8

3 disadvantages of using cost plus markup for transfer pricing

Answer 8

May not reflect market conditions. Can lead to inefficiencies. Markup may make end product less competitive.

Question 9

How is marginal/variable cost transfer pricing determined?

Answer 9

Determined by the additional cost of producing an extra unit.

Question 10

2 advantages of using marginal/variable transfer pricing

Answer 10

Gives a focus on variable costs, promoting efficiency. Encourages divisions to operate at capacity.

Question 11

2 disadvantages for marginal/variable cost transfer pricing

Answer 11

Does not consider fixed costs. May not provide an acceptable profit margin for the supplying division

Question 12

How does full cost transfer pricing work?

Answer 12

It accounts for the entire production costs, both fixed and variable

Question 13

3 advantages of full cost transfer pricing

Answer 13

Ensures full cost recovery. Promotes long term view of profitability. Provides stability

Question 14

3 disadvantages of full cost transfer pricing

Answer 14

Can be less responsive to market changes. If costs rise, inefficiencies may occur. Can be contentious.

Question 15

What is negotiated transfer pricing?

Answer 15

A price that results from discussion and agreements between departmental managers.

Question 16

3 Advantages of using negotiated transfer pricing

Answer 16

Autonomy. Market-based efficiency. Flexibility.

Question 17

3 disadvantages of using negotiated transfer pricing

Answer 17

Time-consuming. Risk of conflict. Power imbalance if unequal leverage between divisions is present.

Question 18

What is Dual-rate Transfer Pricing System?

Answer 18

Uses two separate transfer prices for each interdivisional transaction.

Question 19

Limitations of a dual-rate transfer pricing system.

Answer 19

Confusion due to different transfer prices. Double-counting of internal profits can mislead about divisional profits.