Transfer Pricing Chapter 19

Transfer price Amount charged by one division selling goods/services to another division Intra-organization transfer Overall organization profit is unaffected Transfer price will affect the profit of the divisions involved Revenue to seller, cost to buyer

Transfer price If seller/buyer have no other options Transfer price is irrelevant to the organization What is good for seller is bad for buyer and vice-versa Seller’s revenue will equal buyer’s cost

Transfer price If seller/buyer have options Seller will sell to outsider if transfer price is below market price Buyer will buy from outsider if transfer price is above market price Overall organization’s profit will be affected

General rule Transfer price calculated as Additional outlay cost per unit + Opportunity cost per unit if transferred Transfer price

General rule No excess capacity Would the Assembly Division sell to an external customer offering $95 per unit?

General rule Excess capacity Would the Assembly Division sell to an external customer offering $95 per unit?

Transfer based on external market price Same result as the general rule if no excess capacity exists If excess capacity exists General rule results in a lower transfer price Producing Division can sell to either internal or external customers Assembly Division should purchase from Producing Division

Cost-based transfer price If based on incremental cost Producing Division has no contribution margin If based on full-absorption cost Assembly Division may buy from external source because of higher transfer price May be bad decision because the fixed portion of the transfer price will be incurred regardless

Multinational transfer pricing Multinational companies may operate in countries with different tax rates, import duties, etc. Transfer prices should be set to minimize profits in high-tax countries and maximize them in low-tax countries High transfer price if buyer is in a higher-tax country than the seller

Multinational transfer pricing