Transfer Pricing Flashcards
what is a transfer Price?
the price at which an intermediate product is transferred between divisions or a group of companies
What is the lowest acceptable Transfer Price?
It must cover both the variable costs and the lost Contribution from not making sales
minimum transfer Price = (total variable cost + lost contribution)/ number of units transferred
What is the highest acceptable Transfer Price?
This would be the cost from buying from an outside supplier/ market price
OR
if there is no outside supplier, the highest cost which allows them to still make the desired amount of profit
what are some factors that affect your transfer Price?
TP notes
- Whether your selling Division has Idle capacity
- Whether there is an outside supplier
- do they have Excess stock on hand?
- whether the division/company is forced to sell at a certain price?
- What policy/strategy you are going to use to set your transfer price
- What the minimum and maximum transfer prices are
TP notes
How does Idle capacity affect your transfer Price?
It will determine how much lost contribution you are going to inlude in your Minimum Price figure (think about the Formula)
how does the existence of an outside supplier affect your transfer price
If there is no outside Supplier then the transfer price limit is no longer the outside market but rather whatever the Profit the buying divison/company wants to make on the product. If they want to make R30 profit per unit, then they need to buy at a cost price that allows them to do that
How does having excess stock affect transfer price
It means that there is no market for the goods and therefore there is not going to be any lost contribution, which means the minimum price can be set at the variable cost for the product
Is it good if a company buys from the market, if market is cheaper than the minimum selling price of the other division/company? Why?
Yes because why would the company forfeit the extra profit? (Since the other division would want to buy 18) if we sell for 20 and the market is 18, we are getting extra revenue in that 20 of R2 that we would have to sacrifice as a group/company in order to internally transfer
What are the side effects of having a transfer price that is below the minimum transfer price? And What are the side effects of setting a transfer price above the maximum transfer price?
I still need to finish this answer
What are the pricing policies/stratergies that can be used to set a transfer price? And their considerations?
- cost plus pricing
- target price costing
Look at the pricing card deck In here
What are the pros and cons of using a standard full cost as a transfer price?
Pros
* the buying division doesn’t have to pay the market price and therefore this creates group savings
* the pressure from trying to keep demand for internal sales or help managers of selling divisions keep their costs low
* it helps them pay fixed costs and therefore enables them to break even
* when there is a lack of an external market I need transfer price above variable costs is attractive
Cons
* setting a transfer price at full standard cost causes divisions to lose their autonomy which then affects their motivation and ROI because this transfer price was probably set by head office
* it affects the Roi measurement because the Roi measurement depends on making profit this in turn could demotivate managers because rewards might be based on ROI. This threatened goal congruence since is managers will not be rewarded for producing better
