Transfer Pricing

Question 1

What are the three types of transfer pricing?

Answer 1

1) Market based- price on the open market
2) Cost based- cost of production
3) Negotiated- Price that is mutually agreeable

Question 2

What is the goal of congruence?

Answer 2

Goal of congruence occurs when the department and division managers make decisions that are consistent with those of the organization as a whole.

When managers are acting in their own best interest, it may results in sub optimization

Question 3

What is the general transfer pricing rule?

Answer 3

The transfer pricing rule helps to ensure goal congruence:

Transfer price unit = additional outlay cost per unit + Opportunity Cost Per Unit

What is the additional outlay cost- incremental production costs incurred by selling unit

Question 4

When the selling unit is operating at full capacity, the transfer price should be equal to the market price?

Answer 4

TRUE

When the selling division has excess capacity, the transfer price should be equal to the additional costs incurred to produce each unit.

Question 5

What is dual pricing?

Answer 5

Attempt to eliminate the internal conflicts associated with transfer prices by giving both buying and selling divisions the price that “works best” for them