transfer pricing Flashcards
What is transfer price?
The price charged when one division provides goods/services to another within the same company.
Why is transfer pricing important?
Affects division profits, motivates internal cooperation, and aligns divisional and company goals.
What are the three common approaches to setting transfer prices?
- Negotiated Transfer Prices, 2. Transfers at Cost, 3. Transfers at Market Price.
What is a negotiated transfer price?
A price agreed upon by selling and purchasing divisions, maintaining divisional autonomy.
What is the range for negotiated transfer prices?
Lower limit: Selling division’s variable cost. Upper limit: External supplier cost or buyer’s willingness.
What are the advantages of negotiated transfer prices?
Maintains divisional autonomy, aligns goals, and leverages managers’ insights on costs.
What are the challenges of negotiated transfer prices?
May lead to lengthy negotiations and suboptimal decisions.
What is transfer at cost?
Setting price at variable cost or full absorption cost, including fixed costs.
What is a key challenge of transfer at cost?
Fails to incentivize cost control and may show no profit for selling divisions.
What is transfer at market price?
Transfer price based on the external market price, aligning with competitive forces.
What is the range of acceptable transfer prices with idle capacity?
Lower: Variable cost. Upper: External supplier price.
What is the range of acceptable transfer prices with no idle capacity?
Lower: Variable cost + opportunity cost. Upper: External supplier price.
What is the range of acceptable transfer prices with partial idle capacity?
Lower: Variable cost + average opportunity cost. Upper: External supplier price.
What is the transfer price when no external supplier exists?
Maximum price based on the purchasing division’s profit margin.
What are the principles of divisional autonomy?
Managers make independent decisions while aligning with company objectives.
What are the key objectives of transfer pricing?
Motivate divisional managers, provide a fair basis for evaluation, and align divisional goals.
What are common methods of transfer pricing?
- Negotiated prices, 2. Cost-based prices, 3. Market prices.
What is a practical application of transfer pricing?
Ensures resource optimization, accurate evaluation, and divisional goal alignment.
What should you prepare for in transfer pricing exam questions?
Calculate transfer price ranges, analyze scenarios, and evaluate pricing methods’ impacts on profits.
What is an example of transfer pricing with idle capacity?
Price = Variable cost, e.g., $8 for Cumberland Beverages.
selling division with idle capacity. transfer pricing
transfer price >= variable cost per unit
selling division with no idle capacity
transfer price >= Variable cost per unit + total CM on lost sales/number of units transferred
selling division with some idle capacity
transfer price >= Variable cost per unit + Total CM on lost sales/number of units transferred
negotiated transfer prices approach. range
○ Range:
Lower limit: Selling division’s variable cost + opportunity cost.
Upper limit: Cost of purchasing from an external supplier or the max the purchasing division is willing to pay.
trasnfers at cost approach to transfer prices. key rule
○ Set at Variable Cost or Full Absorption Cost:
§ Variable Cost: Includes costs directly associated with producing the transferred good.
§ Full Absorption Cost: Includes both variable and allocated fixed costs.
transfer at market price approach to transfer prices, key rule
○ Based on Open Market Prices:
§ Works well when the product/service has an external market.
§ Encourages alignment with external competitive forces.
range of acceptable transfer prices, lower limit
Range of Acceptable Transfer Prices
* Lower Limit (Selling Division):
○ With Idle Capacity: Variable cost per unit.
○ Without Idle Capacity: Variable cost + opportunity cost of lost sales.
range of acceptable transfer prices, upper limit
- Upper Limit (Purchasing Division):
○ With External Supplier: Cost of purchasing externally.
○ Without External Supplier: Maximum price the purchasing division is willing to pay based on its profitability.
