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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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