1. Transfer Pricing
Topic Eight

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

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

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

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

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.

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

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.

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

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
The objectives of domestic transfer pricing include: Creating greater divisional autonomy, Providing greater motivation for managers, Enabling better performance evaluation, and Establishing better goal congruence.
The objectives of international transfer pricing include: Lessen taxes, duties and tariffs; Lessen foreign exchange risks; Improve competitive position; and Improve relations with foreign governments.