Transfer price - P2

Question 1

What are the characteristics of transfer pricing?

Answer 1

Sales income to supplying division, purchase cost for the receiving division
No effect on the profit of the organisation as a whole
Both divisions must benefit from the transaction
Transfer prices must be established and agreed
Preference should be to sell and purchase internally

Question 2

What are the objectives of transfer pricing

Answer 2

Goal Congruence
Performance measurement
Maintaining divisional autonomy
Minimising the global tax liability
Recording the movement of goods and services
Fair allocation of profits between divisions

Question 3

What are the three bases for setting a transfer price?

Answer 3

1. Market-based prices – price for the item in the external market. Will mean we having savings in packing, distribution, warranty costs etc.
2. Cost-based prices – full cost or marginal cost which sometimes will include a mark up
3. Negotiated prices

Question 4

What is market based pricing?

Answer 4

price for the item in the external market. Will mean we having savings in packing, distribution, warranty costs etc.

Question 5

What is cost based pricing?

Answer 5

full cost or marginal cost which sometimes will include a mark up

Question 6

What could the intermediate market for the product or services of a selling division be?

Answer 6

Perfect – all suppliers to the market can sell all their output at the prevailing market price
Imperfect – Selling division is unable to sell all its output externally at the same market price