Please enable JavaScript.
Coggle requires JavaScript to display documents.
Transfer Pricing - Coggle Diagram
Transfer Pricing
Transfer Pricing Methods
Market based price
- Received from on active market of buyers/sellers
Cost based price
- Based on production cost of the good/service
Negotiated price
- Managers between units negotiate with one another
Minimum transfer price = VC + Opportunity Cost
Maximum transfer price = Market price
Cost based Prices
Transfer prices are (markups can be applied to all)
VC + FC of production
Full absorption cost
Variable Cost
Cost centre < capacity uses VC of production
Cost = capacity uses full absorption cost
Best when
Excessively costly to obtain
Can lead to bad decisions
No market-rate available
Multinational Companies
Challenges
Evaluating Managers
Motivation for Managers
Tax authorities
- Prices companies use to sell products
Transfer prices are prices for internally used goods/services
Motivate managers
Managers can make decisions within company objectives
Defensible price for tax purposes
A unit of a company is considered on of the following:
Profit centre
Investment centre
Revenue centre
Cost centre
Market based price
Based on external marketing conditions
OR
could be based on prices charged to external customers
Best when
Perfectly competitive market
Price info easily accessible
No incremental cost/benefit when using external suppliers
Interdependencies between operating units are minimal