TRANSFER

PRICING
M. RISKLI VALDI
1810532021
TRANSFER
PRICING

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TRANSFER PRICING
Transfer price is the value of a product that is transferred
between divisions. is recognized as revenue by the sales division
and costs by the purchasing division.
Transfer Pricing Concept
Transfer prices are the prices of goods / services transferred
between responsibility centers within the company, covering all
forms of cost allocation from departments to other departments,
& the selling price of products / services transferred between
profit centers.

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TRANSFER PRICING

Transfer pricing affects the division that transfers and the company as a
whole through:

1. divisional performance measures.

2. firmwide profits.
3. divisional autonomy.

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TRANSFER PRICING

General formula:
• Transfer Price = Full Fee + Profit
• Full costs can use 3 approaches:
• 1. Full Costing Approach
• 2. Variable Costing Approach
• 3. Activity Based Costing Approach

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THE TRANSFER
PRICING
ILLUSTRATION

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THE TRANSFER PRICING ILLUSTRATION

Tyson Manufacturers produces small appliances. The Small Parts

Division produces parts used by the Small Motors Division. The parts
also are sold to other manufacturers and wholesalers.
The Small Motors Division is operating at 70 percent capacity. A request
is received for 100,000 units of a certain model at $30 per unit. A
component for this motor can be supplied by the Small Parts Division.
The transfer price is $8 despite the Small Parts Division only
experiencing a cost of $5 per unit

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THE TRANSFER PRICING ILLUSTRATION

• Using the $8 transfer price, the total cost is $31 per unit, calculated as
follows:

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NEGOTIATED
TRANSFER PRICES

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NEGOTIATED TRANSFER PRICES

• When imperfections exist in competitive markets

for the intermediate product, market price may no
longer be suitable.

• In this case, negotiated transfer prices may be a

practical alternative. Opportunity costs can be used
to define the boundaries of the negotiation set.

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ADVANTAGES &
DISADVANTAGES
NEGOTIATED
TRANSFER PRICES

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ADVANTAGES & DISADVANTAGES
NEGOTIATED TRANSFER PRICES

ADVANTAGES • Allows the company to generate

profit figures for each division in separate manner. •
The sales, pricing and the production departments
can be coordinated through this method • Helps in
resource allocation
• Performance evaluation of each department
becomes easy • Decisions become better and more
timely • Managers’ motivation increases • Reducing
income taxes

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ADVANTAGES & DISADVANTAGES
NEGOTIATED TRANSFER PRICES

DISADVANTAGES • Disagreement among

organizational divisional managers • Additional costs,
time and manpower will be required • Transfer prices
do not work equally • Cause dysfunctional behavior •
Highly complicated • Difficult to estimate the right
amount of pricing policy

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TRANSFER PRICES
ARE BASED ON FEES

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TRANSFER PRICES ARE BASED ON FEES

1. full charge.
2. full fees plus mark-ups.
3. variable costs plus fixed costs.

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OPPORTUNITY COST
APPROACH

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 OPPORTUNITY COST APPROACH

This approach identifies the maximum and minimum

prices that can be accepted by the sales division and
the maximum price that can be paid by the buyer's
division

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 OPPORTUNITY COST APPROACH

The minimum transfer price is the transfer price that

would leave the selling division no worse off if the
goods were sold to an internal division than if the good
were sold to an external party (floor).
The maximum transfer price is the transfer price that
would leave the buying division no worse off if an input
were purchased from an internal division than if the
good were purchased externally (ceiling).
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 First / Last Name
(123) 456-7890
Your Company

THANK YOU!

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