Reference from: International Marketing

by Francis Cherunilam
 The price one segment( subunit, department, division) of
an org charges for a product or service supplied to
another segment of the same organization.
 Minimizing overlapping costs from and between the
decentralized divisions of the company.
 Nurture an infant division of the company in to growth by
buying and selling from or to it
 To facilitate parent companies control.
 To offer management at all levels both in the product divisions
and in the international divisions an adequate basis for
maintaining, developing and receiving credit for their own
profitability.
 Market based Method: when the supplying division
decides to charge from the buying division the current
market rate for the product or service.
 Cost based Method: when the supplying division
decides to charge on the basis of actual or standard
costs to the buying division.
 Negotiation based Method: when managers of the
both buying and selling division jointly negotiate the
price.
 Minimum transfer price= outlay cost plus opportunity cost
 Minimum transfer price should be equal to the outlay cost per
unit that are incurred to the point of transfer plus opportunity
cost per unit to the company as a whole.
 Outlay costs are those directly related to the manufacture and
transfer up to the actual point of transfer.
 Opportunity cost is the market price less outlay cost.
 When goods are shipped to high tariff countries, minimal transfer
prices are quoted to reduce the effect of duty.
 To reduce income tax goods are overpriced when transferred to
units in high tax countries.
 When dividend repatriation is curtailed by govt. policy, income tax
may be taken out in the form of high price for products or
components shipped to units in that country.
Companies thus tends to manipulate transfer prices to circumvent tax
and dividend regulations to maximize their profits.