Transfer Pricing

1. Transfer Pricing Chapter 19

2. Transfer price • Amount charged by one division selling goods/services to another division • Intra-organization transfer • Overall organization profit is unaffected • Transfer price will affect the profit of the divisions involved • Revenue to seller, cost to buyer

3. Transfer price • If seller/buyer have no other options • Transfer price is irrelevant to the organization • What is good for seller is bad for buyer and vice-versa • Seller’s revenue will equal buyer’s cost

4. Transfer price • If seller/buyer have options • Seller will sell to outsider if transfer price is below market price • Buyer will buy from outsider if transfer price is above market price • Overall organization’s profit will be affected

5. General rule • Transfer price calculated as Additional outlay cost per unit + Opportunity cost per unit if transferred Transfer price

6. General rule • No excess capacity • Would the Assembly Division sell to an external customer offering $95 per unit?

7. General rule • Excess capacity • Would the Assembly Division sell to an external customer offering $95 per unit?

8. Transfer based on external market price • Same result as the general rule if no excess capacity exists • If excess capacity exists • General rule results in a lower transfer price • Producing Division can sell to either internal or external customers • Assembly Division should purchase from Producing Division

9. Cost-based transfer price • If based on incremental cost • Producing Division has no contribution margin • If based on full-absorption cost • Assembly Division may buy from external source because of higher transfer price • May be bad decision because the fixed portion of the transfer price will be incurred regardless

10. Multinational transfer pricing • Multinational companies may operate in countries with different tax rates, import duties, etc. • Transfer prices should be set to minimize profits in high-tax countries and maximize them in low-tax countries • High transfer price if buyer is in a higher-tax country than the seller

11. Multinational transfer pricing