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When supply outstrips demand, market prices may

drop well below their historical average.
If the drop in prices is expected to be temporary, these
low market prices are sometimes called, “DISTRESS
PRICES”.
The market prices of several agricultural commodities
have stayed for many years at what observes initially
believed were temporary distress levels.
 USES
Some company use the distress prices themselves, but others use the
LONG-RUN AVERAGE MARKET prices or the “NORMAL
MARKET PRICES”.
 
In the short-run, the manager of the selling division should meet the
distress price as long as its exceeds the incremental cost of supplying the
product or service. If not, the selling division should stop selling the
product or service from an outsider supplier. These actions would
INCREASE the OVERALL COMPANYWIDE OPERATING
INCOME.
  
USES
If the long-run average market price is used, forcing
the manager to buy internally at a price above the current
market price will hurt the buying division’s short-run
performance and understate its profitability.

Using the long-run average market price provides a

better measure of long-run variability of supplier
division.
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TRANSFER PRICES FOR SERVICES

Departments of many large organizations

may sell services for customer and for each other
internally.
The department performing the services to a
second department generates revenue for such
activity.
The same transfer is the second department’s
purchase of services.
FOR EXAMPLE:
A company typically bill administrative services,
such as computer processing, accounting, payroll
and personnel to the departments they support.

In each of the cases, equitable transfer prices must

be established to appraise the department’s
performance for its own return on investment
capital.
 STEPS IN SETTING TRANSFER PRICE FOR
SERVICES:
1. Identify the different departments contributing various
services.
2. Evaluate the corresponding skills and experience of personnel
involved in delivering services.
3. Estimate the cost involved in providing the services. Factors
such as time requirements, qualifications, cost of the facilities
needed to provide the service should be considered.
4. Adopt one or any the principles applied to the transfer of
products (e.g. cost-based transfer price, market-based)
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TRANSFER PRICING is used worldwide to control the
flow of goods and services between segments of
organizations.
However, the objective of transfer pricing change when a
multinational corporation is involved and the goods and
services being transferred must cross international
borders.
Corporations may exchange a transfer price that will
reduce its total tax bill or that will strength a foreign
subsidiary.
THE OBJECTIVE OF INTERNATIONAL TRANSFER
PRICING FOCUS ON THE FOLLOWING:

1. Minimizing taxes, duties and tariffs.

2. Foreign exchange risks along with enhancing a

company’s competitive position.

3. Improving its relation with foreign government.

FOR EXAMPLE:
A division in a high-income-tax-rate county produces a
subcomponent for another division in a low-income-tax-rate
country. By setting a low transfer price, most of the profit form
the production can be recognized in the lo-income-tax-rate
country, thereby minimizing taxes.

On the other hand, items manufactured by division in a

low-income-tax-rate country and transferred to a division in a
high-income-tax-rate country should have high transfer price
to minimize taxes.
Imports duties can offset income tax effects. Usually,
IMPORTS DUTIES are based on the price paid for an
item, whether brought on the outside company or
transferred to another division. Therefore, low transfer
prices will be used to lessen the import duties.

Managers should be sensitive to the geographic, political

and economic circumstances in which they are operating,
and set transfer prices in such a way as to optimize
company performance and at the same time, conform with
the laws in various countries where they operate.