Transfer Pricing and Pricing Decisions

Question 1

Minimum Transfer Price

Answer 1

Is the price at which products and services are transferred between two sub-units in an entity

Affects the INTERNAL profit of both the buying division and the selling division

Question 2

Effect of Transfer Pricing

Answer 2

High transfer price
» Higher profit for the selling division and lower profit for the buying division

Low transfer price
» Lower profit for the selling division and higher profit for the buying division

Question 3

Transfer price formula

Answer 3

TP = Outlay cost + Opportunity costs

> > Outlay costs- incurred as a result of the transfer
Opportunity cost- not considered if with capacity

Question 4

Methods of Transfer Pricing

Answer 4

1) Cost-Based- the price equal to the total unit cost calculated based on absorption or variable costing

2) Market-Based- simulates the selling price that would have been present if the subunits are independent entities

3) Negotiated- An intercompany price set through negotiation between selling and buying managers

Question 5

Factors that affect setting selling price

Answer 5

1) Cost of Production
2) Government law and regulation (includes taxation)
3) Economy
4) Action of Competitors
5) Customer Demand