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IN THE BPP KIT Q.NO360, EVERYTHING IS CLEAR EXCEPT THE PART C IT ASK US TO SUGGEST THE TRANSFER PRICING AND THE TRANSFER PRICING THEY HAVE SUGGESTED IN THE ANSWEER IS $37 WHICH IS THE THE COMPETITORS PRICE OR $36 THIS IS SELLING PRICE- THE (SELLING COSTS )WHICH WILL NOT BE INCURED. BUT ACCORDING TO ME THE PRICE SHOULD BE $20 THAT IS MARGINAL COSTS AS THE SELLING DIV HAS SPARE CAPCITY AND IS NOT RUNNING AT FULL CAPACITY. IS MY THOUGHT TO THE ANSWER JUSTIFIABLE AND WILL I BE GETTING MARKS FOR THIS THOUGHT OR IS IT WRONG.
Please do not type in capital letters.
You would still get credit provided that you expressed it properly. They certainly will not want to reduce the transfer price because they would then be reporting a lot less profit. They will want to charge as much as they can, but the maximum price is limited by the amount that the other division will be prepared to pay.
It depends on the policy that the company decides to use.
For ‘sensible’ transfer pricing we will normally not include fixed costs for the reasons that I explain in my free lectures on transfer pricing.
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