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Please can you help me with transfer pricing? I know its late to start on this topic but i’ve been reading the artical on transfer pricing but i dont quite understand it. i undestand the basic concept of it but when i tried to figure out answer to Section A q1(b) June 2011 i couldn’t answer it and looking at the answer didn’t help me either.
Please can i get some help im studyin this paper on my own. an explaination of what factors need to be focused when trying to answer question on transfer pricing would be helpful.
Many Thankshave you listened to the lecture – it explains transfer pricing very simply. goodluck
The usual aim of setting a transfer price is to ensure that each division makes decisions that are both good for it (that’s why it makes that decision) and good for the group as a whole.
So if you want to ensure that one division sells to another, the transfer psice nust be attractive to the first division (so that it makes and sells to generate a contribution) and must be attractive to the second division so that it can make a contribution if it buys in at the transfer price.
Sometime you do not want transfers within the group. This might be the case if there is a really good outside customer for the component making-division which earns a better profit than selling internally. There the transfer price has to be sufficiently low to ensure that goods are sold outside.
In this question you have to decide whether the service division should keep all the warranty work. It will keep that if it’s well paid, but it might be better setting a low transfer price for that work so that it can earn more from other work after sub-conctracting out the low margin warranty work.
Thank you sir for explaining. I will look at the June11 question again by keeping your suggested solution in mind and i hope it will make better sense.
thanks Mo for your suggestion. I’ve now listened to all the lectures on transfer pricing. I agree,brillient lectures. simple to understand but my problem is real exam question are lot difficult with so much wording!!
Many Thanks
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