Transfer pricing Flashcards
What are two main reasons for transfer pricing within firms?
Internal taxation.
Incentives and performance Measurement of profit or Investment centers.
Name four alternative methods for determining transfer prices.
Market Price: Given a competetive external market for the good, the transfer Price is determined by the external market Price.
Variable cost: Transfer Price is determined by the variable cost of manufacturing the good.
Full cost: Transfer Price is determined by the full(fixed and variable) cost of manufacturing the good.
Negotiated Price: A negotiated Price is determined by negotiations between the purchasing and selling division.
Is the choice of transfer pricing methods a zero-sum game?
No. Changing transfer pricing methods does more than shift income among divisions. The method used can change the profitability of the firm as a Whole because the buying/selling division changes its scale of operations in response to the transfer Price.
What are the pros and cons of transfer pricing?
Pros: Good Tool for performance Measurement and thereby controlling Makes it possible to see the profitability of a cost center. Gives an indication of the optimal Price and quantity which can create value to the firm.
Cons: Expensive. Doesn’t directly add any value to the firm.
