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Hello
I would like to ask about fixed costs and transfer pricing decision making
We seem to be considering marginal costs and marginal revenue while deciding on max/min transfer pricing but what about covering fixed costs?
If in the question I am given the costs and they are split into variable and fixed costs, I will be looking at only variable costs to establish min and max transfer price., am I correct?
Thank you
Mostly it would just be variable costs. A division will buy/sell provided that action can make a positive contribution for it, and contribution depends on MC and MR.
Fixed costs can usually be avoided only in closing down a division and that’s more likely to be a head office decision than a divisional decision.
Dear Mr. Gromit
I thought:
– Variable cost will be encourage for goal congruence while low motivation for division when external market exist.
– Fixed cost: as you said, critical in decision for closing down factory or manufacturer.In deciding max/min transfer pricing (TP) I think TP policy is determined whether variable coverage or fixed one, profit center treatment etc. Opportunity cost is included also, especially when external sale available.
How are your opinion? Could you share with us your opinion for setting TP and assess divisional performance when TP exist? what are the noted point for the exam?
many thanks Sir in advance 🙂
Regards,
Trangtubin
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