Textbook Problem

To determine

(a)

Concept introduction:

In the Transfer Pricing, one unit is transferred from one department to another department. The price of transferred unit is decided through Company's polices. For example: - cost plus margin, fixed price, variable cost etc.

The range of acceptable transfer using the negotiated price approach.

Explanation of Solution

The negotiated price approach provides benefit to the company as a whole. The transfer prices in this should be set between the outside market prices and the variable cost of the product by the department so that each department is gaining in their field.

If the prices are set below the variable cost or higher than the market value then it will affect the divisions and the company as a whole too which is not acceptable...

To determine

(b)

Concept introduction:

In the Transfer Pricing, one unit is transferred from one department to another department. The price of transferred unit is decided through Company's polices. For example: - cost plus margin, fixed price, variable cost etc.

The price acceptable as transfer price in case the managers of the two divisions are not agreeing on a transfer price.