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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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