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Transfer pricing

Prof. GURU PRASAD


FACULTY MEMBER
INC GUNTUR
pgp4149@gmail.com
Transfer Pricing

• Definition: Transfer price is the


price charged for goods and
services in intra company
transfers.
• Transfer Price and selling price
Objectives of Transfer Pricing
 It provides each unit with the
relevant information required for
making cost-benefit trade-off.
 It induces the goal congruence
among business units and
corporation.
 It helps in measuring the
performance of individual profit
centers.
Methods of Transfer Pricing
 Fundamental Principle
 Ideal situation
 Competent people
 Good atmosphere
 Market Price
 Freedom of choice
 Full information
 Negotiation
Why Market Prices cannot be
adopted?
 Limited markets
 Capacity limitations
 Integrated companies
 Differentiated Products
 Investment in facilities
 Short or Excess Capacity in
the Industry
Market Prices for Units that do
not buy or sell outside
 Published Market Prices
 Bids
 Market Prices for similar
Products
Cost Based Prices

 Standard Variable cost


 Mark-up
Two Step Pricing

 Standard Variable cost


 Fixed Costs on percentage of
facilities used
 Profit mark-up
The transfer price for business unit Z
Business Unit 1 Product
Expected monthly sales
to business center z 5000 units
Variable cost per unit
$5
Fixed expenses applicable to the
Facilities reserved for Z
20 000
Investment in assets
1, 200,000
Return on investment
10 %
The transfer price for business unit Z
Variable cost
$5
Fixed costs applicable 20000/5000
4
Return on investment 1200 000/12 X .1
5000
$11
 If the Business Unit Z orders
only for 4 000 units,
 The transfer price is $ 50,000.
The variable cost 4000 X 5 and
the fixed costs 20,000 plus
return on investment 10, 000.
 The excess of $ 6000 is penalty
for Unit Z for not utilizing the
capacity.
Profit Sharing

 The product is transferred to


the marketing unit at the
Standard cost of products
sold.
 After the product is sold,
contribution earned is shared
among the business units,
which is the selling price minus
the variable marketing and
manufacturing costs.
Two sets of prices

 Under this method, the business unit


which manufactures the product will
be credited with the selling prices
minus expenses of marketing unit,
and,, the marketing business unit is
debited with the standard
manufacturing cost. This method is
most desirable for both the business
units and the conflicts between them
can be minimized.
Pricing of Corporate Services

 Control over amount of services


 Optional Use of Service
 The business units may buy these
services from the corporate
department or
 2. They may buy from an outside
party or
 3. They may develop the facilities on
their own or
 4. They may seldom using the service
at all
Administration of Transfer
Prices
 Negotiation
 Arbitration and Conflict
Resolution
 Executive

 Committee