TRANSFER PRICING

A transfer price is the

price paid for goods or
services transferred
within an organization.
 IMPLICATIONS OF TRANSFER
PRICING ON MANAGERIAL AREAS
•affects the performance evaluation of
divisions
•affect division managers' incentives to
sell goods either internally or
externally.
 APPROACHES ON TRANSFER
PRICING
•Market-Based Transfer Prices.

•Cost-Based Transfer Prices

•Negotiated Transfer Prices.

•Administered Transfer Prices.

 MARKET-BASED TP

•the transfer price is based

on the observable market
price for similar goods and
services.
 COST-PLUS TP

•the transfer price is determined

based on the production cost plus
a markup if the upstream division
wishes to earn a profit on internal
sales.
 NEGOTIATED TP

•upstream and downstream

divisions' managers can
negotiate a transfer price that
is mutually beneficial for each
division.
 ADMINISTERED TP

•Administered transfer prices

are set by an arbitrator or by a
rule or policy.
 PROBLEM 1
BDR Company’s Audio Division produces a speaker that is widely used
by manufacturers of various audio products. Sales and cost data on
the speaker follow:

Selling price per unit on the intermediate market P60

Variable cost per unit 42
Fixed costs per unit 8
Capacity in units 25,000

BDR Company has just organized a Hi-Fi Division that could use this
speaker in one of its products. The Hi-Fi Division will need 5,000 speakers
per year. It has received a quote of P57 per speaker from another
manufacturer. BDR Company evaluates divisional managers on the
basis of divisional profits.
 REQUIREMENTS
Assume that the Audio Divison is now selling only 20,000 speakers per
year to outside customers on the intermediate market.
1. From the standpoint of the Audio Division, what is the lowest
acceptable transfer price for speakers sold to the Hi-Fi Division?
2. From the standpoint fo the Hi-Fi Division, what is the highest
acceptable transfer price for speakers purchased from the the Audio
Division?
3. If left free to negotiate without interference, would you expect the
division managers to voluntarily agree to the transfer of 5,000
speakers from the Audio Divison to the Hi-Fi Division? Why or why
not?
4. From the standpoint of the entire company, should the transfer
take place? Why or why not?
 REQUIREMENTS
Assume that the Audio Division is selling all of the speakers it can
produce to outside customers on the intermediate market.
1. From the standpoint of the Audio Division, what is the lowest
acceptable transfer price for speakers sold to the Hi-Fi Division?
2. From the standpoint fo the Hi-Fi Division, what is the highest
acceptable transfer price for speakers purchased from the the
Audio Division?
3. If left free to negotiate without interference, would you expect
the division managers to voluntarily agree to the transfer of 5,000
speakers from the Audio Divison to the Hi-Fi Division? Why or why
not?
4. From the standpoint of the entire company, should the transfer
take place? Why or why not?
 PROBLEM 2
Division X of Charter Corporation makes and sells a single
product which is used by manufacturers of fork lift trucks.
Presently it sells 12,000 units per year to outside customers at
P24 per unit. The annual capacity is 20,000 units and the
variable cost to make each unit is P16. Division Y of Charter
Corporation would like to buy 10,000 units a year from Division
X to use in its products. There would be no cost savings from
transferring the units within the company rather than selling
them on the outside market. What should be the lowest
acceptable transfer price from the perspective of Division X?
 PROBLEM 3
Division P of Turbo Corporation has the capacity for making
75,000 wheel sets per year and regularly sells 60,000 each
year on the outside market. The regular sales price is P100 per
wheel set, and the variable production cost per unit is P65.
Division Q of Turbo Corporation currently buys 30,000 wheel
sets (of the kind made by Division P) yearly from an outside
supplier at a price of P90 per wheel set. If Division Q were to
buy the 30,000 wheel sets it needs annually from Division P at
P87 per wheel set, the change in annual net operating
income for the company as a whole, compared to what it is
currently, would be: