The transfer price affects the profit that a division makes. Transfer prices can seriously affect the reported divisional performance, the motivation of divisional managers and subsequent decisions made. It is important to understand that there is no one right transfer price in a given scenario, but there will be alternative legitimate views with some values being more appropriate or more acceptable than others. In a Performance Management (PM) question, a requirement could be to calculate and discuss the impact of a head office imposed transfer price, or to suggest transfer prices which would be acceptable to each division. ![]() The transfer price set should encourage divisions to trade in a way that maximises profits for the company as a whole.Ī transfer price can be negotiated between the divisions or imposed by head office. Mathematically, the company will make the same profit, but these changing profits can result in each division making different decisions, and as a result of those decisions, company profits might be affected. It is important to see that for every $1 increase in the transfer price, Division A will make $1 more profit, and Division B will make $1 less. This can be calculated either by simply adding the two divisional profits together ($20 + $20 = $40) or subtracting both own costs from final revenue ($90 – $30 – $20 = $40). An introduction to professional insightsĪs things stand, each division makes a profit of $20/unit, and the company will make a profit of $40/unit.Virtual classroom support for learning partners.Becoming an ACCA Approved Learning Partner.
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