Transfer Pricing

Price changed by one department to another

It can be at market price, variable cost,

production cost/full cost , negotiated price

Rule: the transfer price should be set at the

price that maximizes the profit of the company
as a whole: Goal Congruence

A: manufacture ink

pwedeng magbenta sa customer and pwedeng

magbenta kay b

b manufactures ballpen

pwedeng bumili sa supplier at kay a

Ang transfer price at yung price ng a to b vv.

General Rule

Maximum Transfer Price: the max price is kung

magkano bibilin ni b sa supplier, kasi kapag mas
Malaki yung price ni a kesa sa supplier bibili
nalang si b sa supplier. Therefore ang max price
ay SELLING PRIE/ MARKET PRICE

Minimum Transfer Price : equal to incremental

cost + opportunity cost of the selling division

 With Excess capacity : total capacity ni

A is 10k, outside sales is 8k units = ith
excess since may 2k pa ; INCREMENTAL
COST /VARIABLE COST yung fixed cost
hindi kasi magagamit o pa rin siya
 Without excess capacity: 10k 10k
Variable cost + opportunity cost/ loss
contribution margin or in short SELLING
PRICE

 Corporate Profits

Discretionary- hr
Transferring sales between the group
Objectives
Transform traditional to profit center and they
can opt to provide and maximize the revenue o
the company.
Rationale behind transfer pricing
 The building of responsibility centers
are oriented towards designing an
optimal way to assign accountabilities
Fundamentl Principle
 Transfer prices should be similar tot the
prices that would be charged if the
products wee sold to outside custoners
or purchased from outside vendors
 Arms length principle
 Consideratiions:
o Sourcing decisions: should the
company produce the product
or purchase it from a outside
vendor? )Make or buy decision)
o Transfer price decision: If
produced inside, at what price
should the product be
transferred between
profit/investment centers?
(Minimum transfer price)
The ideal situation
A market price based transfer price will induce
goal congruence if all of the following condition
exists
 Competent people
 Good atmosphere
 A market price exists – frequent
problem
 Freedom to source- controllability –
critical problem, links back to
controllability
 Full information: hanggang saan ba tayo
pwedeng mag negotiate, ano ba yung
walk-away price mo para ma consider
yung ibang sources
 Negotiation- similar with external
sourcing : should be part of
environment
Constraints on sourcing
 Limited Markets
o The existence of internal
capacity might limit the
development of external sales
o If a company is the sole
producer of a differentiated
product, no outside source
exists
o IF a company has invested
significantly in facilities, it is
unlikely to use outside sources.
 Excess or shortage of industry capacity
Competitive Price
Transfer price that best satisfies the
requirements of a profit center system is the
competitive price.
Hoe to establish competitive price
 From published market prices
 Sey by biddings