Garrison Chapter 11 - Transfer Pricing.docx

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Management and Organizational Studies
Management and Organizational Studies 3370A/B
Raymond Leduc

Garrison Chapter 11Transfer PricingTransfer pricethe price charged when one segment sells goodsservices to another segment of the same firm o The transaction between segments has no direct effect on the entire firms reported profit because the revenue recorded by the selling division is offset by the cost recorded by the buying divisions o Objective in setting transfer prices motivate managers to act in the best interests of the overall company suboptimization occurs when managers do not act in the best interests of the company or in the best interests of their own segment3 methods of transfer pricing 1 Negotiated transfer pricestransfer price is agreed on between sellingpurchasing divisions a Preserves autonomy of divisions and consistent with decentralization b Managers of divisions are likely to have much better info about the potential costsbenefit of the transfer than others in the company c Transfer price will have an upper limit determined by the purchasing division and a lower limit determined by the selling divisionaka range of acceptable transfer pricesi The selling divisions lowest acceptable price Transfer price must beorto VC per unitTotal CM on lost sales of units t
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