Transfer Pricing Flashcards
EOR: What is the purpose of Transfer Pricing
To ensure goal congruency within an organization and to allocate scarce resources the best way at company level
EOR: What are the key questions being addressed in TP ?
What TP should be and the quantity to be used in TP
EOR : What is the most important information needed for TP ?
MV + MC + NMR
EOR : What are the main inferences/conclusions reached in TP?
The key questions are - Minimum or maximum TP that can be set or the Optimal quantity for Transfer TP.
EOR : Key Concepts in TP
MinimumTP - spare / No spare capacity
Maximum TP - Price elasticity / No price elasticity
Optimal quantity depends on the market :
- Perfect market
- Imperfect market
- No Market
EOR : What are the main assumptions used in TP?
- Use Standard costs so that there is no transferring of inefficiencies between divisions
- ## Each man out for himself; TP is to level the playing field and to ensure goal congruence. Tool to keep everyone under 1 umbrella.
EOR: What are the implications/consequences of TP?
Better performance management of an entity
EOR: What points of view are relevant to TP ?
Buyer and seller, external market impacts
What is the minimum TP for the supplying division?
Spare capacity
VC
What is the minimum TP for the supplying division?
No Spare capacity
VC + Opportunity cost
What is the maximum TP for the buying division?
Price elasticity (demand changes with SP) ?
Break even occurs when Contribution of best = contribution of second best
Steps:
1. Calc Contribution at SP indicated
2. Rank them
3. Equate the 2
4. Q1 (SP-VC-TP) = Q2(SP -VC-TP)
5. Solve for TP
What is the maximum TP for the buying division?
No Price elasticity ?
Breakeven is where :
Contribution = 0
Ie, Q(SP-VC-TP) = 0
Solve for TP.
What makes up marginal costs ?
What makes up Profit mark up ?
What makes up full costs ?
What makes up negotiated costs ?
Variable costs
VC + FC + MU
VC + FC
VC + FC - MU(Negotiate)
