Mastery Problem: Overview of transfer pricing When one division of a company sells to another division of a company, the price charged is called the transfer price. The transfer price affects the costsof the buying division and the revenues of the selling division. The goal of upper management is to set a transfer price that motivates divisional managers to make decisions that improve the profit of their division and the profit of the company as a whole There are three methods commonly used to establish a transfer price: market price, cost, and negotiated price The price at which a product can be purchased from an outside supplier is the market transfer price. When cost is the basis of the price, the transfer price is the cost transfer price or the ost plus a percentage price; and when the transfer price is agreed between the selling managers and the buying managers, the transfer price is a negotiated transfer price. Seacoast Foods is a manufacturer that has several divisions. The company is decentralized and each division operates as a profit center. Assume that Selling Division of Seacoast manufactures a product that can be used by Buying Division of Seacoast. Consider the three transfer pricing policies that could be used by Seacoast. A negotiated approach is the best approach to transfer pricing if Selling Division can sell as much as it produces and there are no cost savings from transferring internally. A cost approach may be needed if there are no outside companies that produce the product that Buying Division is looking for. A negotiated transfer pricing approach would allow Selling Division and Buying Division to share in savings that arise when costs are avoided due to internal transfers. One reason for companies to set transfer pricing policy is to move profits from one division to another. This may be done for competitive reasons, when the goal is to challenge division management to act as a standalone company in order to compare a division with its competitors. Another reason to move profits is for tax purposes or other cost savings for the company as a whole Selling D vision sells 36,200 units to Buying Division. Selling Di son's tax rate is 15% and Buying Division's tax rate is 25%. Market price is S68.20 per unit, and it costs Selling Division $28.10 to produce each unit. Overall Corporation abides by tax authority guidelines and can support the use of market-based transfer pricing and cost plus 20% transfer pricing Which transfer pricing method should Overall Corporation use when Selling Division sells to Buying Division to take advantage of the best tax rate? Market-based transfer pricing What is the savings when this method is used? 12,481.1 X Mastery Problem: Overview of transfer pricing When one division of a company sells to another division of a company, the price charged is called the transfer price. The transfer price affects the costsof the buying division and the revenues of the selling division. The goal of upper management is to set a transfer price that motivates divisional managers to make decisions that improve the profit of their division and the profit of the company as a whole There are three methods commonly used to establish a transfer price: market price, cost, and negotiated price The price at which a product can be purchased from an outside supplier is the market transfer price. When cost is the basis of the price, the transfer price is the cost transfer price or the ost plus a percentage price; and when the transfer price is agreed between the selling managers and the buying managers, the transfer price is a negotiated transfer price. Seacoast Foods is a manufacturer that has several divisions. The company is decentralized and each division operates as a profit center. Assume that Selling Division of Seacoast manufactures a product that can be used by Buying Division of Seacoast. Consider the three transfer pricing policies that could be used by Seacoast. A negotiated approach is the best approach to transfer pricing if Selling Division can sell as much as it produces and there are no cost savings from transferring internally. A cost approach may be needed if there are no outside companies that produce the product that Buying Division is looking for. A negotiated transfer pricing approach would allow Selling Division and Buying Division to share in savings that arise when costs are avoided due to internal transfers. One reason for companies to set transfer pricing policy is to move profits from one division to another. This may be done for competitive reasons, when the goal is to challenge division management to act as a standalone company in order to compare a division with its competitors. Another reason to move profits is for tax purposes or other cost savings for the company as a whole Selling D vision sells 36,200 units to Buying Division. Selling Di son's tax rate is 15% and Buying Division's tax rate is 25%. Market price is S68.20 per unit, and it costs Selling Division $28.10 to produce each unit. Overall Corporation abides by tax authority guidelines and can support the use of market-based transfer pricing and cost plus 20% transfer pricing Which transfer pricing method should Overall Corporation use when Selling Division sells to Buying Division to take advantage of the best tax rate? Market-based transfer pricing What is the savings when this method is used? 12,481.1 X