Transfer Pricing - Short Notes and Examples

Thanks to ACCA P5, I've taken this from a youtube, very good explanation and very clear. It is good for you guys to follow;

TRANSFER PRICING

Aims:

·         Profits for each division

·         Autonomy

·         Goal congruence to maximise group and divisional profits

Required for:

·         Accountability

·         Performance measurement

Transfer Price ‘Rules’

Minimum transfer price (determine by the transferor, or seller):

                   MC + lost contribution from transferring internally

Maximum transfer price (determine by the transferee, or buyer):

                   Lower of nMR and external buy-in price

Example 1: Basic

Division A produces goods and transfers them to Division B which packs and sells them to outside customers. Division A has costs of RM10 per unit, and Division B has additional costs of RM4 per unit.

Division B sells the goods to external customers at a price of RM20 per unit.

Example 2: Basic at cost plus

Division A has costs of RM15 per unit, and transfer goods to Division B which has additional costs of RM5 per unit. Division B sells externally at RM30 per unit. The company has a policy of setting transfer prices at cost plus 20%.

Calculate:

a)   The transfer price

b)   The profit made by the company overall

c)   The profit reported by each division separately

Example 3 and 4: at goal congruence

Division A has costs of RM20 per unit, and transfer goods to Division B which has additional costs of RM8 per unit. Division B sells externally at RM30 per unit.

The company has a policy of setting prices at cost plus 20%.

Example 5: limited demand and unlimited production

Division A has costs of RM15 per unit, and transfer goods to Division B which has additional costs of RM10 per unit. Division B sells externally at RM35 per unit.

Division A can sell part-finished units externally for RM20 per unit. There is limited demand externally from A, and A has unlimited production capacity.

Example 6: unlimited demand and limited production

Division A has costs of RM15 per unit, and transfer goods to Division B which has additional costs of RM10 per unit. Division B sells externally at RM35 per unit.

Division A can sell part-finished units externally for RM20 per unit. There is unlimited demand externally from A, and A has limited production capacity.

Example 7:

Division A has costs of RM8 per unit, and transfer goods to Division B which has additional costs of RM4 per unit. Division B sells externally at RM20 per unit.

Determine a sensible range for transfer price in order to achieve goal congruence, if Division B can but part-finished goods externally for:

a)   RM14 per unit.                    b)  RM18 per unit

Taken from ACCA P5 Transfer Pricing, practical approaches, goal congruence