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Chapter 12

Method 2: Cost based approach

 This is the minimum price. The selling division may also want to cover some/ all
of the fixed costs and recognise a % profit.

 The standard cost should be used rather than the actual cost to aid planning
and prevent inefficiencies being passed on to the buying division.

 There are a number of different standard costs that could be used:

– Full cost

– Marginal (variable) cost

– Opportunity cost.

Illustrations and further practice

Now try TYU 6 ‘Full cost and marginal cost’, TYU 7 ‘Opportunity Cost
approach’, TYU ‘Additional example’ and the ‘Transfer Pricing’ objective test
question.

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