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Transfer Pricing (Types of Transfer Pricing (Market-based (Division…
Transfer Pricing
Types of Transfer Pricing
Market-based
Division profits similar to if they were separate
Cost plus mark-up
Motivate supplying managers if divisions are assessed on profit
Marginal/variable cost
Full cost
Negotiated
Opportunity cost
Where supplying division sacrifices external sales
Purposes of Transfer Pricing
Provide information for decision-making
Provide information for evaluating performance
To ensure divisional autonomy
To intentionally move profits between divisions
Problems with Transfer Pricing
Some divisions might end up operating at a loss
Impact divisions assessed on profitability
Motivation problems
Transfer prices should promote goal congruence