QUESTION 2
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Table of Contents

Transfer pricing 3

Methods of fixing transfer price 4

1. Market based transfer prices 4

Buyer 4

Seller 4

Group 5

Conclusion 5

2. Full cost transfer prices 6

Buyer 6

Seller 7

Group 7

Conclusion 7

3. Cost-plus a mark-up transfer prices 8

Buyer 8

Seller 9

Group 9

Conclusion 9

4. Negotiated transfer prices 10

Buyer 10

Seller 10

Group 11

Conclusion 11

References 12

Transfer pricing

Transfer pricing is the establishing the price of goods that are sold between related legal entities in a company. It is practiced by centralized organizations to monitor the transfer of products or service from one division of the company to another (O'brien & Oates, 2007). For example, the six segments of the General Electric Company are trading amongst themselves (General Electric Company, 2006).

Methods of fixing transfer price

Market based transfer prices

The external market prices for the intermediate products are used to set the transfer price. The strategy presumes that the acquiring division will secure the products from the manufacturing division at the same price as in the external market. Although the external market is usually rarely or never accessed, the competitive price determines the minimal intra-organization transfer price (Feinshreiber, 2004). General Electric uses this strategy since it priced the intersegment trading based on commercial rates

Buyer

Under this strategy, the autonomy of the buying division is maintained. There is no time wasted in bagging negations hence the division can focus more on its productivity (Shor and Chen, 2009). However, this strategy