BUS 322 Lecture Notes - Lecture 7: Transfer Pricing, Perfect Competition

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 322
• Professor: Mahmoudian Fereshteh

Document Summary

Transfer price: price for internal selling transaction, not affect org total sales/profit affect division performance if evaluated on profitability. Incentive for org best interest + retain autonomy (decentralized org) General rules: tp = outlay cost + oc. Imperfection condition: price change due to amount change. Perfect condition: complex if cannot sell/buy all want. No excess capacity + perfect competition: outlay cost + oc (market price) Excess capacity/imperfect competition: tp = market price: producing division sell internal/ external, Distress market price (significant excess capacity, extremely low price): tp = market price not org best interest, producing division => more profitable product line. Unit level cost: producing division: no show contribution margin/produce and transfer efficiently => set tp. Absorption cost: tp = unit level + higher level (batch, product, customer, facility) Negotiated tp: divisiveness, competition, not sole dominant evaluation factor. Dysfunctional decision making: reject transfer even org best interest.