Transfer pricing

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Negotiated transfer pricing

Negotiated transfer pricing depends to a large extent on the degree of autonomy accorded to the divisions . Where there is external influence from top management the process of determining the transfer price between departments will be hampered . Sometimes the top management intervenes since the transfer price set may maximize profit for one division while the profit of the company as a whole is not maximized i .e . benefiting one division at the expense of the company 's welfare

br The negotiated transfer price will depend to a large extent on negotiation skills and abilities of managers however other factors such as the market price of the product and cost of both the selling and buying division also play a major role in determination of transfer price . The selling division will only agree to the transfer when their profit increases as a result of transfer . On the other hand the buying division can only agree to a transfer price which leads to an increase in profit . Where the transfer price is below the cost incurred by the selling division a loss will occur and hence the selling division will not accept that transfer price . On the other hand where transfer price is set too high the buying division will hardly make any profit therefore the negotiated transfer price has a lower limit as determined by the selling division situation and the upper limit as determined by the buying division

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situation . The...