The Importance of Transfer Pricing

Question 1: Explain the importance of transfer pricing to organizations.

Question 2: List and describe the various methods used for price transfer.

Question 3: Explain how transfer pricing can affect performance evaluation measures.

Question 4: Assume assembly is below capacity. This means there is no opportunity cost of selling internally since no outside sales are forgone as a result of the transaction. What is the appropriate transfer price in this scenario?

Question 5: M Products, LLP, has two divisions - Choc and Min. The Choc division typically sells to the Min division for $3 per pound, which covers variable costs. The Choc division sells to outside customers for $5 per pound. Use the general economic transfer pricing rule to address the following requirements:

• Calculate the optimal transfer price assuming the Chocolate division is below capacity.
• Calculate the optimal transfer price assuming the Chocolate division is at capacity.