Question

Question 3: Identify two main advantages and two behavioural implications of the use of the

         following transfer pricing methods:   

         a. Market Based Transfer Price                                                                        

         b. Standard Cost Based Transfer Price                                                             

Note: There should be four advantages and four behavioural implications in total, i.e. each transfer pricing method will have two disadvantages and two behavioural implications.

Answer 1

Market based transfer price-

This transfer price is usually used when the company's product has adequate demand in external market and price in external market is in excess of the price quoted by other internal division.

This arises as a result of high level of disagreement between the divisional managers on price and quality related factors.

The advantage of this method may be true identification of correct market value of product.

The other one can be taken as helpful in goal congruence.

Standard cost based transfer price-

This transfer price is uses when the internal disagreement between the divisional managers are high and top management has to intervene between the divisional manager to achieve comman goal of company.This transfer price is used when the demand in external market is stable.

The advantage of this method may be taken as acheivement of high profits.

And another advantage can be taken as divisional managers satisfaction on the transfer price.This leads to achievement of profits.

Please comment for any additional or specific information.

Thanks,