Page 212 - 5.2 i. Manac Costing ITC Summarised Notes

TRANSFER PRICING

Other Prices

The maximum negotiated profit

• This refers to the incremental profit that would be made by the
receiving division on the ultimate sale of the goods.

The negotiated transfer price

• normally obtained through negotiation between selling and

buying divisions

• It should lie between the minimum and maximum prices calculated.

• Opportunity cost exists only if there are sacrificed external sales due to
the internal transfer of goods (and is the contribution thus lost).
• Range of acceptable transfer prices:

• The upper limit (determined by the buying division – receivers of product)

• Lower limit (determined by the selling division – suppliers of product)
Advantages of negotiated transfer prices:

• Negotiated transfer prices preserve the autonomy of the divisions,
which is consistent with the spirit of decentralization.
• The managers negotiating the transfer price are likely to have much

better information about the potential costs and benefits of the
transfer than others in the company.
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