TRANSFER PRICING

In a dynamic market where an organization's divisions are captive with respect to specific products, a flexible transfer pricing policy is necessary. In establishing a pricing policy, the transfer price can equal: 1. the selling division's outlay plus opportunity cost, 2. the selling divis...

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Bibliographic Details
Published inStrategic finance (Montvale, N.J.) Vol. 69; no. 8; p. 30
Main Authors Cats-Baril, William, Gatti, James F, Grinnell, D Jacque
Format Magazine Article
LanguageEnglish
Published Montvale Institute of Management Accountants 01.02.1988
Subjects
Opportunity costs
Pricing policies
Product life cycle
Transfer pricing
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Summary:In a dynamic market where an organization's divisions are captive with respect to specific products, a flexible transfer pricing policy is necessary. In establishing a pricing policy, the transfer price can equal: 1. the selling division's outlay plus opportunity cost, 2. the selling division's outlay plus either fixed fee or a share of the profit on the final product, or 3. the buying division's opportunity cost. Suboptimal decision making and reduced profits will result unless the transfer price is adjusted as an internally transferred product moves through its product life cycle from unique to homogeneous. Guidelines for developing a transfer pricing policy include: 1. Encourage price negotiations between the buying and selling divisions. 2. Base negotiations on market reference prices. 3. Encourage divisions to adjust transfer prices on a timely basis. 4. Use an appropriate approach to establish a transfer price for newly introduced unique, proprietary products.
ISSN:1524-833X