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When goods are transferred from one division in a company to another division, and there is an intermediate
external market for the transferred item in which the goods could be sold, which of the following states the
economic transfer pricing rule for what the maximum transfer price should be?
A Marginal cost of the transferring-out division minus any lost contribution of the transferring-out
division from having to make the internal transfer
B The higher of the net marginal revenue for the transferring-in division and the external purchase price
in the market for the intermediate product
C The lower of the net marginal revenue for the transferring-in division and the external purchase price
in the market for the intermediate product
D None of the abovesir i donot understand these answer why b is incorrect and c is correct
C is certainly correct, and is the standard rule for the maximum transfer price that the receiving division will pay.
With regard to B, whey on earth should the receiving division ever be prepared to pay more that the price they can get the goods for externally – they would be mad to do so!!
I suggest that you watch my free lectures on transfer pricing where I work through a series of examples to explain exactly what is happening and why. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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