Question

If the market price of a good is below the minimum transfer price, the buying profit center should:

Select one:

A. Negotiate a lower transfer price

B. Not engage in the transfer, but rather buy from outside suppliers

C. Accept the transfer price: the money all stays in the company anyways

D. Accept the transfer price and charge a higher selling price

E. None of the above

Answer 1

Ans . A  Negotiate a lower transfer price

Negotiated Pricing: Under this method, the transfer prices may be fixed through negotiations between the
selling and the buying division. Sometimes it may happen that the concerned product may be available in
the market at a cheaper price than charged by the selling division. In this situation the buying division may be
tempted to purchase the product from outside sellers rather than the selling division. Alternatively the selling
division may notice that in the outside market, the product is sold at a higher price but the buying division is
not ready to pay the market price. Here, the selling division may be reluctant to sell the product to the buying
division at a price, which is less than the market price. In all these conflicts, the overall profitability of the firm
may be affected adversely. Therefore it becomes beneficial for both the divisions to negotiate the prices
and arrive at a price, which is mutually beneficial to both the divisions. Such prices are called as ‘Negotiated
Prices’.