Question

Why do you think multinational companies would choose to use cost-plus transfer pricing? What benefits does this method offer?

Answer 1

The cost plus transfer pricing method combines the costs incurred by provider of services or supplier of property with the gross markup from the costs. When calculating a cost-plus transfer pricing, the multinational companies add a margin on the cost of the good with compilation of the standard cost together along a standard profit margin. Afterwards resulting price is used as the transfer price. The multinational firms have to not worry about currency fluctuation, price escalation, time extension etc. as all these uncertainties are part of the cost to be considered by client. This method offers a guarantee against loss-making by a firm. If it finds that costs are rising, it can take necessary steps by variations in output and price. Furthermore, when it is not possible to collect market information for the product or it is costly, cost- plus pricing is an appropriate method. It is best suitable where the nature and extent of competition is unpredictable.