Set Transfer Price at Market Price:
Some form of the competitive marketed price (i.e., the price charged
for an item on the open market) is often regarded as the best approach to
the transfer pricing problem. Particularly if transfer prices
negotiations routinely become bogged down.
The market price approach is designed for situations in which there is
an outside market for the transferred product or service; the product or
service is sold in its present form to outside customers. If the selling
division has no idle capacity, the market price in the outside market is
the perfect choice for the transfer price. The reason for this is that if
the selling division can sell a transferred item on the outside market
instead, then the real cost of the transfer as for as the company is
concerned is the opportunity cost of the lost revenue on the outside
sale. Whether the item is transferred internally or sold on the outside
market, the production costs are exactly the same. If the market price is
used as the transfer price, the selling division manager will not lose
anything by making the transfer, and the buying division manager will get
the correct signal about how much it really costs the company for the
transfer to take place. While the market price works beautifully when the
selling division has no idle capacity, difficulties occur when the
selling division has idle capacity. |
