Page 144 - APM Integrated Workbook STUDENT S18-J19

Chapter 9

Transfer pricing

8.1 Introduction

The transfer price is the price at which goods/services are
transferred between divisions in the same organisation.

A good transfer price should:

1 Result in goal 2 Be fair for each 3 Maintain divisional
congruence. division. autonomy.

4 Aid bookkeeping in the 5 Legally minimise the global
recording of the internal transfers. tax liability of the organisation.

8.2 The general rules for setting transfer prices

Scenario 1: A perfectly competitive market exists for the product

Optimum TP = Market Price + Any small adjustment.

 Only one price in the market.  If division’s product not identical to
that offered by market.
 No buying or selling costs.
 If division saves costs when
 Market can absorb all output of transferred internally (e.g. on
primary division and meet delivery or marketing).
requirements of secondary division.

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