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    Group 7 Transfer Pricing

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    MD Hafizul Islam Hafiz
    The document discusses transfer pricing, which is the price at which divisions within a company transact with each other. It then provides definitions and discusses key issues like revenue basis and preferred customers/suppliers. Various transfer pricing methods are outlined such as market rate, negotiated rate, cost plus, and others. Examples are given including Prachi Papers, which produces wood and paper, to illustrate optimal transfer pricing between divisions. International transfer pricing can impact tax liabilities between countries.

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    Group 7 Transfer Pricing

    Uploaded by

    MD Hafizul Islam Hafiz
    24 views18 pages
    The document discusses transfer pricing, which is the price at which divisions within a company transact with each other. It then provides definitions and discusses key issues like revenue basis and preferred customers/suppliers. Various transfer pricing methods are outlined such as market rate, negotiated rate, cost plus, and others. Examples are given including Prachi Papers, which produces wood and paper, to illustrate optimal transfer pricing between divisions. International transfer pricing can impact tax liabilities between countries.

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    Managerial Accounting

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    group 7 transfer pricing

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    The document discusses transfer pricing, which is the price at which divisions within a company transact with each other. It then provides definitions and discusses key issues like revenue basis and preferred customers/suppliers. Various transfer pricing methods are outlined such as market rate, negotiated rate, cost plus, and others. Examples are given including Prachi Papers, which produces wood and paper, to illustrate optimal transfer pricing between divisions. International transfer pricing can impact tax liabilities between countries.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    24 views18 pages

    Group 7 Transfer Pricing

    Uploaded by

    MD Hafizul Islam Hafiz
    The document discusses transfer pricing, which is the price at which divisions within a company transact with each other. It then provides definitions and discusses key issues like revenue basis and preferred customers/suppliers. Various transfer pricing methods are outlined such as market rate, negotiated rate, cost plus, and others. Examples are given including Prachi Papers, which produces wood and paper, to illustrate optimal transfer pricing between divisions. International transfer pricing can impact tax liabilities between countries.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 18

    Introduction -transfer price

    The price at which is divisions of a company transact with each


    other. Transactions may includes the trade of supplies or labor
    between departments. Transfer prices are used when individual
    entities of a large Multi-entry firm are created and measured at
    separately run entities.
    Definition -Transfer Pricing
    Transfer pricing is a setting of the price for goods and services
    sold between related legal entities within an enterprise.
    E.g: if a subsidiary company sells goods to a parent company,
    the cost of those goods is the transfer price.
    KEY ISSUES- TRANSFER PRICING

    Revenue Preferred
    Basis Customers

    Preferred
    Suppliers
    Revenue basis:
    The manager of a subsidiary treats its same manner that he would price
    of a product sold outside of the company. It forms part of the revenue of
    his subsidiary , and is therefore crucial to the financial performance on
    which he is judge.
    Preferred customer:
    If the manager of a subsidiary is given the choice of either to a
    downstream subsidiary or to outside customers, then the excessively low
    transfer price will lead the manager to sell exclusively to outside
    customers, and to refuse orders originating from the downstream
    subsidiary.
    Preferred suppliers:
    If the manager of a downstream subsidiary is given the choice of buying either
    from an upstream subsidiary or an outside supplier, then an excessively high
    transfer price will cause the manager to buy exclusively from outside
    suppliers. As a result, the upstream subsidiary may have too much unused
    capacity, and remain profitable.
    Methods- Transfer Pricing

    Market Rate
    Adjusted market Rate
    Negotiate
    Contribution margin
    Cost-plus
    Cost Based
    Market rate transfer pricing
    The simplest and most elegant transfer price is to use the narket price. By doing so,
    the upstream subsidiary can se either inerna or externally and earn the same profit
    worth either option. It can also earn the highest possible profit, rather than being
    subject to the odd profit vagaries that can occur under mandated pricing schemes.

    Adjusted market rate transfer pricing


    If it is not possible to use the market ricing technique just noted, then consider using
    the general concept, but incorporating some adjustments to the price. For example,
    you can reduce the market price to account for the presumed absence of bad debts,
    since corporate management will likely intervene and force a payment if there is a
    risk of non- payment.
    Negotiator transfer pricing
    It may be necessary to negotiate a transfer price between subsidiaries, without using
    any market price as a baseline. This situation arises when there is no dissemble market
    price because the market is very small or the goods are highly customized. This results
    in prices that are based on the relative negotiating skill of the parties.

    Contribution margin transfer pricing


    If there is no market price at all from which t derive a transfer price then an alternative
    is to create a price based n a components contribution margin.
    Cost plus transfer pricing
    If there is n market price at all on which to base a transfer price, you could consider
    using a system that creates a transfer price based on the cost of the components
    being transferred. The best way to do this is to add a margin onto the cost , where
    you compile the standard cost of a component , add a standard profit Margin, and
    use the result as the transfer price.

    Cost based transfer pricing


    You can have each subsidiary transfer its products to other subsidiaries at cost, after
    which successive subsidiaries add their costs to the product. This means that the
    final subsidiary that sells the completed goods to a third party will recognize the
    entire profit associated with the product.
    Examples- transfer pricing

    Prachi papers

    Wood Paper
    division division

    trees Wood For


    paper
    making paper
    PRACHI PAPERS
    COST AND PRODUCTION DATA

    Average units produced 100,000


    Average unites sold 100,000
    Variable manufacturing cost per unit $ 20
    Variable finishing cost per unit $ 30
    Fixed divisional cost (unavoidable) $ 2,000,000 $ 4,000,000
    THE SETTING
    Prachi Papers-resources Flow

    Wood division Wood Paper division


    (Selling division) (buying division)
    Variable cost= $20 Variable wood cost = $30
    Fixed cost= $2,000,000 Transfer price Fixed cost= &4,000,000

    Market for wood Market for paper


    (intermediate markets price=?) (final market price=?)
    Assume The Following Data For The Wood Division:

    Capacity in units 100000


    Selling price to outside $ 60
    Variable price per unit $ 20
    $ 20
    Fixed price per unite(based on capacity)

    The paper division is currently purchasing 100000 units from an outside supplier for $50 , but
    would like to purchase units from the wood division.
    Transfer price = variable cost (vc)+ lost contribution margin(cm)

    If the wood division is working at capacity: Transfer price= $20+$40

    If the wood division has idle capacity: Transfer price = $20+$0


    Optimal Transfer Price

    There is no intermediate market .


    In this case , the only outlet for the wood division is the paper division
    and the only source of supply for the paper division is the wood
    division.
    The optimal transfer price is the outlay cost fir producing the goods
    (generally the variable costs).
    Perfect Intermediate Marked Quality Differences

    Variable manufacturing cost (wood division )per unit $20


    Variable finishing cost (paper division )per unit $30
    Other data:
    final market paper price $120
    intermediate market (grade A wood) price $60
    intermediate market (grade B wood) price $50
    Managers’ Goal Versus Firms’ Goals

    Transfer price higher than market:


    buying division will not buy

    Transfer price lower than market:


    selling division will not sell
    Multinational Transfer Pricing

    International (or interstate) transfer pricing can affect tax liabilities,


    royalties, and other payments due to different laws in different countries or
    states.

    Company incentive:
    increase profit in low- tax country
    decrease profit in high- tax country

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