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TP General Rule: should reflect the true cost to the whole company (More…

- - - - A) If Selling division has spare capacity Marginal cost is the true cost (including also direct OH as it is true cost to the company as a whole)
        B) Selling division has no has no external market so could operate as accost centre if selling division is profit centre it will be demotivated as fixed cost will not be recovered.
    - - A) May lead to a transfer price encouraging Buying Division to look for external supplier
      - B) This may lead to a wrong decision as fixed costs are not the relevant cost.
      - Variable cost solve the problem but this means fixed costs of selling division is not covered and could keep it loss making in total.
      - Fixed Costs can be considered in marginal cost of TP
        
        Two-part Tariff
        
        TP are set at Variable costs and once a year transfer of a fixed fee (this amount depends upon the capacity that supplying division has) to the supplying division representing than allowance for the fixed costs. This should allow the supplying division to cover its fixed costs and make a profit.
        
        Dual Pricing
        
        Where there is an external market CR Selling division with the market price but DR buying division with variable costs
- - - - opportunity cost is contribution lost from the external sale foregone
    - - the opportunity cost (shadow price) is
        
        Nil or
        
        Opportunity lost by not using the resources on alternative products