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Hi
I would like to have some help on Paper June 2011-Question 1 (b) transfer pricing.
Please explain to be about the market pricing and cost based approach of TP.
I didnt understand why the $ 200 market price has been treated as revenue for the services dept (39600 X 200), when you outsource , this should have been appear as a cost to the comp because the comp have to pay the outsource comp for each each repair done on JHK behalf, right???
Please if possible explain to me the whole part on transfer pricing (June 2011-Q1 (b)).
I have failed last time dont want to fail this time.The point is “What should the service division charge the M/S division?”
If it used a market-price approach, then it would charge the M/S division $200. instead of its current 10,000/(440,000 x 9%) = $252.53. The market price for the work gives both parties an external benchmark about what the work should cost or earn.
At present the high transfer price gives the service department an easy ride as the oursourcer could do the work and make a profit at $200 a job. Also, the price of this work to M/S is high as presumably it could go directly to the outsourcer itself – and that wouldn’t be a good decision for the group. So $200 keeps the service department on its toes and efficient and encourages M/S to feel that it isn’t getting a raw deal.
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