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Hello Mr. Moffat,
it’s so good to see your lectures even if I have to repeat them. I would like to ask you about transfer pricing. I am wondering why should we have a transfer price. It creates profit and we are charged with taxes. But even if one division just transfers the products to another division at cost pricing why do we care about the profitability of division A. We accept that division’s A work is to make the products and transfer them and we can measure them in other ways (quality etc.). Even if we have division A to give at cost its products to division B and also sells externally then we can measure their performance separately of the transfers and the sales.I am thinking now that we are not going to be charged with taxes because what is profit for one division is an expense for the other, so the overall profit for the company will be 0. But still, don’t understand why one division must put markup profit on cost for transferring goods to another division.
In real life, taxes are a big factor. However this is excluded from Paper F5 and so is not relevant.
The problem is that although companies could use other things to measure divisional performance, the most likely thing they will measure is the profits in each division (and this is what we are concerned about in Paper F5).
When this is the case, then no manager is going to sell to the other division (or buy from the other division) if that would lose money for their division.
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