Transfer Pricing

Question 1

Objectives of transfer pricing

Answer 1

Goal congruence

• best to think about the objective of each division and how the transfer price will impact its decision

Controllability

Question 2

Min transfer price

Answer 2

VC up to the point of transfer + Opp costs to the selling division.

If no idle capacity, min transfer price = market price.

If no idle capacity, min transfer price = VC