TRANSFER PRICING:
CHARGED BY DIVISIONS WHEN GOODS OR SERVICES PROVIDED TO OTHER DIVISON IN SAME
ORGANISATION
OBJECTIVES OF TP:
1) GOAL-CONGRUENCE: THE DECISIONS OF EACH DIVISION SHOULD BE CONSISTENT WITH THE
OBJECTIVES OF THE COMPANY AS A WHOLE
2) AUTONOMY: THE POWER OF DIVISIONAL MANAGERS TO MAKE THEIR OWN DECISIONS THIS
CREATES MOTIVATION BUT DYSFUNCTIONAL DECISIONS CAN BE MADE AS A RESULT
3) PERFORMANCE MEASUREMENT: ALLOWS BOTH THE SELLING DIVISION AND BUYING DIVISION
TO BE TREATED AS PROFIT CENTRES. THE PERFORMANCE OF EACH DIVISION CAN THEN BE
MONITORED
4) RECORDING MOVEMENT OF GOODS: THE TP IS USEFUL TO RECORD THE MOVEMENT OF GOODS
BETWEEN DEPARTMENTS
ADVANTAGES OF MARKET BASED TP:
•
•
THE TP IS SEEN AS FAIR AS THIS THE SAME PRICE THAT WOULD BE PAID / RECEIVED ELSEWHERE
THE COMPANY WILL NOT BE NEGATIVELY AFFECTED AS THE TP IS THE SAME AS COULD BE PAID /
RECEIEVED ELSEWHERE
DISADVANTAGES OF MARKET BASED TP:
•
•
•
THERE MAY NOT BE AN EXTERNAL PRICE
THE EXTERNAL PRICE MAY CHANGE DUE TO CUSTOMERS / DISCOUNTS
SAVINGS IN COST OF TRAVELLING, MARKETING, ADMINISTRATION COST, ETC.
SELLER – MINIMUM TP
IF EXTERNAL UNLIMITED DEMAND – MARKET PRICE - SELLING COST (ANY ADJUSTMENT)
EXTERNAL MARKET AND SPARE CAPACITY – VARIABLE COST ONLY
EXTERNAL MAERKET AND NO SPARE CAPACITY – VARIABLE COST + OPPORTUNITY COST
NO EXTERNAL MARKET – FULL COST (VC + FC)
BUYER – MAXIMUM TP
MAXIMUM TP – LOWER OF:
•
•
NET MARGINAL REVENUE
OR
EXTERNAL PURCHASE PRICE
•
NET MARGINAL REVENUE = FINAL SALES PRICE – ADDITIONAL VARIABLE COST