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Is it true that we charge sensible transfer pricing to get the maximum profits (ie optimize the profits) because the head office has given autonomy to the divisional managers to decide which price to charge inter-divisional (each other).
Sensible transfer price is the price that is charged by both selling division and buying division to each other for internal transferring as well as it is charged externally.
The minimum transfer price is charged by the selling division (div A) to the buying division (div B) which is actually the internal sales of division A but buying cost of division B.
The maximum transfer price is charged by the buying division (div B) to the selling division (div A) which is actually the internal sales and as well as externally which is actually the external sales.
Am I right, Sir?
You are right apart from the last paragraph.
The maximum transfer price is the most that the buying division is prepared to pay. They are not charging the other division anything.
Have you watched my free lectures on this?
The maximum transfer price is the most that the buying division is prepared to pay for the goods to the selling division (div A) and externally as well which is actually the internal costs of division B.
Is it correct now?
Thank you for your help 🙂
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