BPP – Page 88 (311- Hammer)

Hammer is using a cost-plus approach to determining the transfer price.

If they use full cost-plus (as they are doing here) on all their goods, then they are guaranteed to make a profit. However it may not be goal-congruent for the company overall because the shops will not be motivated to buy from Nail if they can buy externally at a lower price.

Also, the total fixed costs of Nail need charging between the various products they produce and not only would this be time consuming but it will be impossible to charge ‘accurately’.

They could use marginal cost-plus instead, but the problem then (as I explain in my free lectures on pricing) would be deciding what % mark-up to add, given that they need to make enough contribution overall to cover the fixed costs.