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Divisional performance measurement and transfer pricing

2.2 Setting the transfer price

Method 1: market based approach

If an external market exist for the transferred goods then the transfer
price could be set at the external market price.

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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