Transfer Pricing

Question 1

What is a transfer price?

Answer 1

is the price charged internally by one component of an organization to another piece of the same organization for a product or serivce.

Question 2

what is the goal of transfer pricing?

Answer 2

should be to motivate each division to act in its best interest and ultimately the best interest of the company as whole.

Question 3

what is the minimum transfer pricing when the operating division is a profit center?

Answer 3

Minimum transfer price = variable costs up to the point of transfer + opportunity cost to the selling division

Question 4

when market price is used as transfer pricing?

Answer 4

if the market for the intermediate product was perfectly competitive and the selling division had no idle capacity.

Question 5

when transfer pricing equals the variable costs?

Answer 5

when selling division has the idle capacity or there is no market existed for the intermediate products

Question 6

when market base transfer pricing is recommended?

Answer 6

• the immediate market must be perfectly competitive and information readily available
• Interdependence between the departments must be minimal
• there must be no additional costs or benefits to the organization as a whole in using the external market instead of transacting internally.