If an internal selling division can also sell products to outside companies at a prices that...

If an internal selling division can also sell products to outside companies at a prices that are greater than the selling division's marginal costs for these products how should the selling division set its transfer prices for these same products when it sells them to the internal buying division?

Expert Solution

The goods are generally transferred internally when the minimum price of selling division is equal or less than the maximum price of selling division. With these maximum and minimum prices, the managers can determine on the transfer price. The price to determine the value of internal transfers of goods and services is termed to be transfer price. When the goods are sold outside the firm the market price often determines the transfer price. The external market price also acts as an excellent internal transfer price as it permits both selling and internal division to be treated as an independent firm. The selling division may also save on advertising cost and shipping cost; and reduce the costs of production when the selling division finds it simpler to schedule the production for internal sales in comparison to external sales. Thus adjusted transfer price will be computed as: Market price - Saving due to reduced manufacturing costs - savings due to reduced shipping costs

Rahul Sunny answered 9 months ago

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