Transfer Pricing
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Transcript Transfer Pricing
Transfer Pricing
Chapter 19
Transfer price
Amount charged by one division selling
goods/services to another division
Intra-organization transfer
Overall organization profit is unaffected
Transfer price will affect the profit of the
divisions involved
Revenue to seller, cost to buyer
Transfer price
If seller/buyer have no other options
Transfer price is irrelevant to the
organization
What is good for seller is bad for buyer and
vice-versa
Seller’s revenue will equal buyer’s cost
Transfer price
If seller/buyer have options
Seller will sell to outsider if transfer price is
below market price
Buyer will buy from outsider if transfer price
is above market price
Overall organization’s profit will be
affected
General rule
Transfer price calculated as
Additional outlay cost per unit
+ Opportunity cost per unit if transferred
Transfer price
General rule
No excess capacity
Producing Division
$80 cost per unit
100 unit capacity
Assembly Division
Transfer price?
External wholesale customers
100 unit demand
$100 price
$20 per unit
profit
External retail customers
$130 price
80 unit demand
$50 per unit
profit
Would the Assembly Division sell to an
external customer offering $95 per unit?
General rule
Excess capacity
Producing Division
$80 cost per unit
500 unit capacity
Assembly Division
Transfer price?
External wholesale customers
100 unit demand
$100 price
$20 per unit
profit
External retail customers
$130 price
80 unit demand
$50 per unit
profit
Would the Assembly Division sell to an
external customer offering $95 per unit?
Transfer based on external
market price
Same result as the general rule if no
excess capacity exists
If excess capacity exists
General rule results in a lower transfer price
Producing Division can sell to either internal
or external customers
Assembly Division should purchase from
Producing Division
Cost-based transfer price
If based on incremental cost
Producing Division has no contribution
margin
If based on full-absorption cost
Assembly Division may buy from external
source because of higher transfer price
May be bad decision because the fixed
portion of the transfer price will be incurred
regardless
Multinational transfer pricing
Multinational companies may operate in
countries with different tax rates, import
duties, etc.
Transfer prices should be set to minimize
profits in high-tax countries and maximize
them in low-tax countries
High transfer price if buyer is in a higher-tax
country than the seller
Multinational transfer pricing
Seller in hightax country
Buyer in lowtax country
Revenue
Third-party costs
Transferred goods cost
Taxable income
Tax rate
Tax liability
$
5,000,000
(300,000)
$
4,700,000
75%
3,525,000
$ 30,000,000
(1,400,000)
(5,000,000)
$ 23,600,000
30%
$ 7,080,000
$ 35,000,000
(1,700,000)
(5,000,000)
$ 28,300,000
Revenue
Third-party costs
Transferred goods cost
Taxable income
Tax rate
Tax liability
$
2,000,000
(300,000)
$
1,700,000
75%
1,275,000
$ 30,000,000
(1,400,000)
(2,000,000)
$ 26,600,000
30%
$ 7,980,000
$ 32,000,000
(1,700,000)
(2,000,000)
$ 28,300,000
$
$
Combined
$ 10,605,000
$
9,255,000