Transfer Pricing

Transfer Pricing

Introduction

Transfer pricing is a mechanisim through which one department transfers goods and services to another division of the same company. These transactions between the divisions are recorded in the company books by the accounting system, leaving one department and entering another deparment. These are also assigned a monetary value. The monetary value assigned is based on the transfer price set by the division transferring the goods and services (Garret, 2009).

Discussion

Under the current arrangement, Division A purchases 3,000 units of product 101 from Division C at a price of $1,000/unit, and 1000 units of product 101 from an external supplier at a price of $900/unit. Under this scenario, total cost for Division A totals $3,900,000. Following is the computation of the cost.

Similarly, Division B purchases 2,000 units of product 201 from Division C at a price of $ 1,000/unit, and 2,000 units from an external supplier at a cost of $900/unit. The total cost of product 201 to Division B totals $ 3,900,000. Following is the computation of the cost.

Under the current arrangement the total cost to Kringly Corporation totals $ 7,800,000. However, according to the new proposed alternative, Division A will buy only 2,000 units from Division C at a price of $1,000/unit, and 2,000 units from an external supplier at a price of $900/unit. Under this arrangement total cost to Division A for product 101 will be $3,800,000. Following is the computation of the cost.

In the same way, Division B will purchase only 500 units from Division C at a price of $2,000/unit, and 1,500 units from an external supplier at a price of $1,900/unit. Total cost of product 201 for division B under new proposed alternative will be $3,850,000. Following is the computation of cost to Division B.

It is clearly evident that under new proposed alternative, the ...