MA 8 Transfer Pricing Flashcards
Define transfer pricing
The price paid for one department or division to transfer a product or service to another division
Goal of transfer pricing
To allow divisions to act in the best interests of the company - transfer pricing should motivate and evaluate
Minimum transfer price equal
Variable costs up to point of transfer + opportunity cost of selling division
In a perfectly competitive market and no idle capacity, what would be minimum price selling company would accept?
Market price
With idle capacity what would be minimum price?
Variable costs
3 methods of transfer pricing
Cost-based
Market-based
Negotiation
Two types of cost based pricing
Full-absorption
Variable
Pros and Cons of cost-based pricing
+ simple
+ can be readily calculated
- may encourage decisions that do not benefit company as a whole
- distribution of profit may be unfair to buyer or seller
- may encourage production inefficiences
Under what 3 conditions will market-based pricing be optimal?
- perfectly competitive markets and info readily available
- minimal interdependencies between departments
- no additional costs to company for using external sources
Pros and Cons of market-based pricing
+ it’s simple, if external market prices are readily available
+ if selling division is at full capacity, it will encourage transfers only if beneficial to entire company
- external market prices may not be readily available
- suboptimal decisions may be made by the seller and/or buyer if there is excess capacity
Pros and Cons of negotiated transfer pricing
+ Divisions are given independence and control
+ Divisions build relationships with each other
+ The price usually benefits the entire organization
- The price is determined by each division’s negotiating ability
- time-consuming
