Advantages And Disadvantages Of Market Based Transfer Prices

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1) Market based transfer prices
Market based transfer prices occur where a perfectly competitive market exist for intermediate products which makes it optimal for both decision making and performance evaluation to set transfer prices at competitive market prices. A perfectly competitive market exist when products sold are all the same and no individual buyer or seller can affect market prices. Transfer prices are recorded at market prices therefore divisional performance is likely to represent the real economic contribution of the division to total company profits. If the supplying division did not exist, the intermediate products would have to be purchased on the outside market at the current market price. Alternatively, if the receiving
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Rationale is that DIV A is already selling in the market place, with already known market price therefore it will sell to DIV B its products with an already set market prices which motivates and encourages the managers to compete to the market because there's independence to buy and sell their products this promotes profits optimization and divisional autonomy.
Disdadvantages of market transfer pricing
1. The market price may be temporary or fluctuate frequently.
2. There may not be an external market price available to enable the divisions to base their prices on
3. Large multinational companies such Coca- Cola can not use market based transfer pricing as estimating a market price becomes more difficult. For example, Coca-Cola ships cola concentrate around the globe which no market as such exists.
4. When DIV A is not selling already in the market place and has overused capacity then holding out for a market price for DIV B would be sub-optimal because as long as it achieved its variable costs it makes sense because it has unused capacity.
5. Setting a market price for DIV A products when there is still no market for the intermediate product means that the managers have to find a comparable product to estimate the price for DIV B which might not be really
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The transfer prices set a full cost does not include profit mark-up.
Advantages of full cost transfer prices
1. Beneficial when its difficult to determine the actual amount of profit mark-up for the goods and services
Disadvantages of full cost transfer prices
1. This method is limited as would give rise to poor cost estimates for long run marginal costs for both divisions
2. The method does not motivate managers as it does not provide incentive for the supplying division to transfer goods because they do not include mark-up

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