10-1 Transfer Pricing Transfer Pricing Topic Eight

10-2 The transferred good is revenue to the selling division and cost to the buying division. This value is called transfer pricing. Transfer Pricing

10-3 Some Major Issues Impact on divisional performance measures Impact on firm wide profits Impact on divisional autonomy Transfer Pricing

10-4  Market price  Negotiated transfer prices  Cost-based transfer prices Variable cost Full (absorption cost) Transfer Pricing

10-5 Negotiated Transfer Prices When imperfection exists in competitive markets for the intermediate product, market price may no longer be suitable.

10-6 Negotiated Transfer Prices In this case, negotiated transfer prices may be a practical alternative. Opportunity costs can be used to define the boundaries of the negotiation set.

10-7 Disadvantages of Negotiated Transfer Prices 1.One division manager, possessing private information, may take advantage of another divisional manager. 2.Performance measures may be distorted by the negotiating skills of managers. 3.Negotiation can consume considerable time and resources.

10-8 Despite the disadvantages, negotiated price transfer prices offer some hope of complying with the three criteria of goal congruence, autonomy, and accurate performance evaluation.

10-9 Cost-Based Transfer Pricing  Full-cost transfer pricing  Full cost plus markup  Variable cost plus fixed fee

10-10 International Aspects of Transfer Pricing Transfer Pricing Objectives Domestic Greater divisional autonomy Greater motivation for managers Better performance evaluation Better goal congruence International Less taxes, duties, and tariffs Less foreign exchange risks Better competitive position Better governmental relations