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Greetings Sir.
Kindly go through my notes for the ADV and DIS of transfer prices, as this is what I have been studying for the coming exams:ADV
TP should be deemed to be fair for both the purchasing mgr and selling mgr because the buying mgr will pay the same amount for the purchase whether purchased internally or externally and for the selling manager, he will receive the same amount whether sold internally or externally.Co will not be negatively impacted bcoz TP is same as external market price
DIS
There may be no external mkt priceExternal mkt price may be different due to discounts offered for bulk purchasing
Selling internally leads to costs saving in distribution expense hence this cost should be deducted from ext mkt price before deciding the TP
Assessing performance may sometimes lead to decisions that are not goal congruent
Measuring the right lvl of divisional autonomy may be difficult
A few problems.
One is that the whole purpose of having a transfer price is to be able to measure the performance of each division separately. That is the benefit.
The problem is not the idea of having a transfer price, but that if the transfer price is not fixed sensibly, then there is a risk of there being a lack of goal congruence (that managers make decisions that are not good for the company as a whole).
If the transfer price is determined sensibly (using the ‘rules’ that I explain in the free lectures) then that problem does not exist.
(Please don’t post the same question twice using two different names!! It won’t get you an answer any faster – we reply within 24 hours and usually a lot quicker, but we don’t sit in front of the computer 24 hours a day 🙂 )
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