1. Transfer Pricing
Chapter 19

2. 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

3. 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

4. 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

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

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

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

8. 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

9. 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

10. 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

11. Multinational transfer pricing