Appendix 11A: Additional Control Topics

What are negotiated transfer prices?

From negotiation between selling & buying divisions

• buyer sets maximum price (upper limit)

• seller sets minimum price (lower limit)

• because each department is responsible for the transfer price, there’s no sub-optimization

What are some concerns of the transfer price method?

Seller:

• not maximizing benefit

• inappropriate cost controls

• producer makes no profit

Buyer:

• do it to maintain relationship with supplier

What is the market price (upper limit)?

The price charged for an item on the open market → the upper limit of the transfer price range!

• only acceptable if there’s no idle capacity

• seller could sell at higher/market price & make more profit

What is the lower limit of the transfer price range formula?

This is the lowest acceptable transfer price!

• if the seller is at idle capacity, they don’t need to sacrifice any CM, so the lower limit = UVC!

= UVC + (CM x # of units (CM lost) / # units transferred)

What happens if the buyer needs 2000 units, but the seller only has 1000 units of idle capacity?

Only need to give up 1000 units, since the other 1000 units are covered by the idle capacity

What happens if the lower limit (min price) is higher than the upper limit (max/market price)?

No transfer range is possible!