GROUP 1

YULIANA RISKA
(171000531010)

AIRIN RIZA
(1910531022)

ANGELA VERONIKA
(1910532025)

http://www.free-powerpoint-templates-design.com
TRANSFER PRICE
Sub
Material :
01 DEFINITION

APPLICATION OF TRANSFER
02 PRICE

03 IMPACT OF TRANSFER PRICE

04 OBJECTIVES OF TRANSFER
PRICE
Sub
Material :
05 OPPORTUNITY APPROACH

TRANSFER PRICING METHODS

06
DEFINITION
Transfer price is a price that is set for
interdivsion in the organization.

PRICE

Ekternal Internal

Market price Transfer price

APPLICATION OF TRANSFER PRICE
Transfer price can only be applied to the company
that has a profit center or investment center in
which output of one division is used as input of
other division.

Value of the transferred goods is revenue to

the selling division, and cost to the buying
division.
In a profit center or an investment center,
division’s manager performance will be evaluated
based on profit (profit center) or ROI/RI/EVA
(investment center).
Ideally, to achieve the optimum profit, selling
division can sell their products to other
division or to market (which is higher) and
buying division can also buy their input from
other division or from market (which is
lower).
 Manager from one division may
IMPACT OF TRANSFER PRICE take advantages at the expense of
ON DIVISION another even though the company
performance as a whole is not
affected

IMPACT OF TRANSFER PRICE ON

FIRM-WIDE PROFIT

1. Divisional manager, acting independently, may set transfer price that

maximize divisional profit, but adversely affect firm-wide profit. For
example, the Buying Division may decide to purchase the goods from an
outside party because the outside price is lower than the transfer price,
when in reality, the cost of producing the goods internally is much lower
than the transfer price.
2. Transfer pricing can affect overall corporate income taxes, specially for
multinational corporations. More revenue or less cost will be assigned to
divisions in low-tax countries, and more cost or less revenue is assigned
to divisions in high-tax countries.
IMPACT OF TRANSFER PRICE ON
DIVISIONAL AUTONOMY

Because transfer pricing can affect firm-wide profitability, top management

is often tempted to intervene and dictate desirable transfer price. It may
effectively abandoned decentralization and all of its advantages. Intervention
by central management to reduce this cost may actually prove to be more
expensive in the long-run than nonintervention.
PRINCIPLES OF TRANFER PRICING

Each division has arm’s length

transctions (each division is assumed
as independent business units)
 OBJECTIVES OF TRANSFER PRICE

To make an accurate performance

evaluation. No one divisional manager
should benefit at the expense of another

To create goal congruence. Divisional

manager selects actions that maximize
firm-wide profit

To create the autonomy. Central

management should not interfere with the
decision-making freedom of divisional
managers
 TRANSFER PRICING METHODS
1. Market price based transfer pricing
 Perfectly competitive market price
 Selling division is able to sell all of their product at capacity
 Since minimum transfer price for the Selling Division is the market price, and the maximum
transfer price for the Buying Division is
also market price, the only possible transfer price is the market
price.
 This is the best transfer pricing method because it is suitable for
autonomy

2. Negotiated transfer price

• No perfectly competitive market price exist)
• Selling Division has idle capacity
• Minimum transfer price for Selling Division is variable production cost, and maximum
transfer price for Buying Division is market price
Maximum transfer price for Mineral Water Division is $ 28, while minimum transfer price for
Plastic Bottle is $ 24. Transfer price can be set between maximum and minimum price.
Ideal Transfer price:
24 + ((28 – 24) / 2) = $ 26
 Disadvantages negotiated Advantage

A divisional manager who has

private information may take 1
advantage of other divisional
manager
.
Performance measures may Negotiated transfer prices offer
be distorted by the negotiating 2 1 some hope of complying with
skills of managers three objectives (accurate
performance evaluation, goal
congruence, and autonomy)
Negotiation can consume
considerable time and 3
resources.
.
3. Cost based transfer price This method will be used if there is no market price, especially
for semi-finished product.

Full cost transfer price

• DM + DL + FOH V and portion of fixed FOH
• Disadvantage: can provide perverse (bad) incentive
and distort performance measures

Full cost plus mark-up (percentage). This method may be used

if fixed cost can not be covered by outside selling revenues.

Variable cost plus fixed fee. This method may be used if there is
idle capacity (whether produce or not, fixed cost still incurs.
 Illustration: Avoidable Transportation Costs
SALES AND PRODUCTION DATA
BOARD DIVISION GAME DIVISION
Units sold:
Per day 1.000 350
Per year (260 days) 260.000 91.000
Unit Data:
Selling price $ 22 $ 45
Variable costs:
Manufacturing $ 12 $ 32
Selling $ 2 $ 3
Annual fixed cost $ 1.480.000 $ 610.000
The $ 2 distribution cost is avoided if the board is sold internally.
Minimum transfer price is $ 20 and maximum transfer price is $ 22 (assuming
that game division can buy board from market at $ 22), and set the limits of the
negotiated price. Assuming the concession price is $ 21,10 per unit, so Board
Division will increase profit by $ 385 per day ((21.10 – 20) x 350 units)), and
Game Division will increase profit by $ 315 per day ((22 – 21.10) x 350 units) or
$ 81.900 per year ($ 0.90 x 91.000 units).
 BEFORE NEGOTIATION: ALL SALES TO EXTERNAL

    Board Division   Game Division Total

Sales 260.000 x $ 22 5,720,000 91.000 x $ 45 4,095,000 9,815,000

       
COGS 260.000 x $ 12 (3,120,000) 91.000 x $ 32 (2,912,000) (6,032,000)
Selling Exp 260.000 x $ 2 (520,000) 91.000 x $ 3 (273,000) (793,000)

Total VC (3,640,000) (3,185,000) (6,825,000)

CM 2,080,000 910,000 2,990,000

FC (1,480,000) (610,000) (2,090,000)

Net Income 600,000 300,000 900,000

           
 AFTER NEGOTIATION: INTERNAL TRANSFER PRICE @ $ 21,10

    Board Division   Game Division Total

Sales - External 169.000 x $ 22 3,718,000 91.000 x $ 45 4,095,000 9,733,100

Internal 91.000 x $ 21.1 1,920,100    

  5,638,100    
COGS 260.000 x $ 12 (3,120,000) 91.000 x $ 31.10 (2,830,100) (5,950,100)
Selling Exp 169.000 x $ 2 (338,000) 91.000 x $ 3 (273,000) (611,000)

Total VC (3,458,000) (3,103,100) (6,561,100)

CM 2,180,100 991,900 3,172,000

FC (1,480,000) (610,000) (2,090,000)

Net Income 700,100 381,900 1,082,000

Net Income before Negotiation 600,000 300,000 900,000

Change in Net Income 100,100   81,900 182,000
 Illustration: Excess Capacity

Pharmaceuticals
•Units sold 250.000 units
•Selling price $ 0.85 per bottle
•Variable cost $ 0.60 per unit, not including the
cost of the plastic bottle
•Cost of bottle $ 0.40 per bottle Plastics
•Loss $ 0.15 per bottle (0.85 – (0.6 + 0.4) or total
$ 37.500 ($ 0.15 x 250.000)
•Variable cost per bottle $
0.15
•Has excess capacity (fixed
cost will not change whether
to make the bottle or not)
• The minimum transfer price for Plastic Division is $ 0.15
(only variable cost is relevant to the decision because of
excess capacity). The maximum transfer price for
Pharmaceuticals Division is $ 0.25, so total cost will be $
0.85 ($ 0.60 + $ 0.25). Better transfer price is between the
minimum and maximum price, in this case $ 0.20. Each
division will have the same CM.
 TRANSFER PRICE OF $ 0.40
Pharmaceutical Plastics Total
Sales $ 212.500 $ 100.000$ 312.500
Variable exp. (250.000) (37.500) (287.500)
CM (37.500) 62.500 25.000

TRANSFER PRICE OF $ 0.25

Pharmaceutical Plastics Total
Sales $ 212.500 $ 62.500$ 275.000
Variable exp. (212.500) (37.500) (250.000)
CM 0 25.000 25.000
 TRANSFER PRICE OF $ 0.20
Pharmaceutical Plastics Total
Sales $ 212.500 $ 50.000$ 262.500
Variable exp. (200.000) (37.500) (237.500)
CM 12.500 12.500 25.000

TRANSFER PRICE OF $ 0.15

Pharmaceutical Plastics Total
Sales $ 212.500 $ 37.500$ 250.000
Variable exp. (187.500) (37.500) (225.000)
CM 25.000 0 25.000
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