management. lecture 12. transfer pricing

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Last updated 8:52 AM on 10/14/26
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11 Terms

1
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transfer pricing is

the internal price charged by one segment of a firm for a product or service supplied to another segment of the same firm.

<p>the internal price charged by one segment of a firm for a product or service supplied to another segment of the same firm.</p>
2
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what is transfer pricing for the selling division and the buying division

revenue for the selling division and cost for the buying division

3
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why do we care about transfer pricing?

  • tit determines BU managers P&L (and compensation)

  • it determines how corporate profit is divided among BUs

  • it determiens corporate income taxes

  • over a third of all global trade takes place within firms


4
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how to set transfer prices

  1. external market price if possible.

  2. cost-based transfer prices if external market prices are unavailable.

  3. selling and buying division managers negotiate transfer price


5
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what to do if selling division cannot make a long-run profit at the external market price

buy intermediate product externally assuming no strategic reason to keep the selling division

6
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what to do if buying division cannot make a long-run profit at the external market price

stop processing the intermediate product further. sell it externally assuming no strategic reason to keep the buying division.

7
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disadvantage of cost-based transfer prices

allows selling division to transfer its inefficiencies to the buying division

8
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disadvantage of selling and buying division managers negotiate transfer price

very time-consuming and political

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why can a good offer from external sources cause some worries

  • if the source is new, it has not yet demonstrated that it can deliver high quality

  • offer may be lowballing bid to gain market share and their price can increase in the future.

  • switching costs

  • sourcing internally can adversely affect the ability to get good quotes from outside suppliers in the future.


10
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Transfer pricing not only determines how corporate profit is divided among BUs. It impacts overall corporate profits by:

  • affecting corporate income taxes

  • affecting BU managers’ P&L and compensation


11
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tensions with transfer pricing schemes

transfer price scheme that reflects true business/incentive purposes vs transfer pricing scheme for tax optimising purposes