Transfer Pricing (2)

Question 1

Different approaches to transfer pricing?

Answer 1

Market based

Full cost

Variable cost

Full cost plus %

Variable cost plus %

Head office intervention

Opportunity cost

Question 2

Market based impact on selling division?

Answer 2

Earn some profit as external sales

Equitable performance management

Question 3

Market based impact on buying division?

Answer 3

Happy to accept transfer

Equitable performance management

Question 4

Market based impact on company?

Answer 4

Goal congruent behaviour should arise

Question 5

Full cost impact on selling division?

Answer 5

No incentive to transfer unless spare capacity

Question 6

Full cost impact on buying division?

Answer 6

Happy to accept (if less than market price)

Question 7

Full cost impact on company?

Answer 7

May lead to dysfunctional behaviour

Question 8

Variable cost impact on selling division?

Answer 8

No incentive to transfer

Question 9

Variable cost impact on buying division?

Answer 9

Happy to accept

Question 10

Variable cost impact on company?

Answer 10

May lead to dysfunctional behaviour

Question 11

Full cost plus % impact on selling division?

Answer 11

Covers all costs and makes a contribution to profit so happy to sell

Question 12

Full cost plus % impact on buying division?

Answer 12

May not accept as price could be higher than market price

Question 13

Full cost plus % impact on company?

Answer 13

May lead to dysfunctional behaviour

Question 14

Variable cost plus % impact on selling division?

Answer 14

May not cover all fixed costs

Question 15

Variable cost plus % impact on buying division?

Answer 15

Will accept if lower than market price

Question 16

Variable cost plus % impact on company?

Answer 16

May lead to dysfunctional behaviour

Question 17

Head office intervention impact on selling division?

Answer 17

Lack of autonomy so demotivating

Question 18

Head office intervention impact on buying division?

Answer 18

Lack of autonomy and demotivating

Question 19

Head office intervention impact on company?

Answer 19

Goal congruent behaviour should arise

Question 20

Opportunity cost impact on company?

Answer 20

Goal congruent behaviour should arise