2 Transfer priceAmount charged by one division selling goods/services to another divisionIntra-organization transferOverall organization profit is unaffectedTransfer price will affect the profit of the divisions involvedRevenue to seller, cost to buyer
3 Transfer price If seller/buyer have no other options Transfer price is irrelevant to the organizationWhat is good for seller is bad for buyer and vice-versaSeller’s revenue will equal buyer’s cost
4 Transfer price If seller/buyer have options Seller will sell to outsider if transfer price is below market priceBuyer will buy from outsider if transfer price is above market priceOverall organization’s profit will be affected
5 General rule Transfer price calculated as Additional outlay cost per unit+ Opportunity cost per unit if transferredTransfer price
6 General rule No excess capacity Would the Assembly Division sell to an external customer offering $95 per unit?
7 General rule Excess capacity Would the Assembly Division sell to an external customer offering $95 per unit?
8 Transfer based on external market price Same result as the general rule if no excess capacity existsIf excess capacity existsGeneral rule results in a lower transfer priceProducing Division can sell to either internal or external customersAssembly Division should purchase from Producing Division
9 Cost-based transfer price If based on incremental costProducing Division has no contribution marginIf based on full-absorption costAssembly Division may buy from external source because of higher transfer priceMay be bad decision because the fixed portion of the transfer price will be incurred regardless
10 Multinational transfer pricing Multinational companies may operate in countries with different tax rates, import duties, etc.Transfer prices should be set to minimize profits in high-tax countries and maximize them in low-tax countriesHigh transfer price if buyer is in a higher-tax country than the seller