Approaches to transfer pricing

In this lesson

1. 0:00 Transfer pricing approaches overview
2. 2:50 Cost-based transfer pricing methods
3. 4:14 Finding the ideal transfer price
4. 7:19 Market price approach worked example
5. 9:03 Market price with external limitations
6. 11:08 Capacity constraints and opportunity costs
7. 14:04 Spare capacity versus full capacity
8. 16:52 Cost-based approach advantages and problems
9. 19:01 Production versus general overheads example
10. 22:03 Two-part tariff and dual pricing alternatives

About this lesson

Transfer pricing is a key topic in Performance Management and Advanced Performance Management, and understanding when to use market-based, cost-based, and negotiated approaches will help you tackle exam questions with confidence. The lesson covers three core approaches: market-based pricing, which uses external market prices when available; cost-based pricing, which uses variable cost, full cost, or marginal cost plus a markup; and the importance of considering opportunity costs when divisions operate at or above capacity. You'll learn how to identify the ideal transfer price by maximising profit for the organisation as a whole, then determining the acceptable price range for both buying and selling divisions. The lesson emphasises that the ideal transfer price often sits within a range rather than being a single fixed amount. Through worked examples, you'll see how to apply these concepts in different scenarios: when spare capacity exists, when there's no external market, and when production is limited. The lesson also covers alternative approaches like two-part tariffs and dual pricing, along with their advantages and drawbacks. By the end, you'll understand how to recommend a transfer price that balances divisional autonomy with group profitability, and when it's better to buy externally rather than transfer internally.

Duration: 24m