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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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