Transfer pricing

In this lesson

1. 0:00 Transfer pricing fundamentals
2. 1:03 Transfer pricing objectives explained
3. 2:09 Simple transfer pricing example
4. 4:01 Impact of transfer price changes
5. 5:00 Profit statement layout and structure
6. 6:46 Worked example: two transfer prices
7. 8:40 Variable cost transfer pricing calculation
8. 9:51 Market price transfer pricing calculation
9. 11:04 Transfer pricing methods overview
10. 12:15 Cost-based vs market-based approaches
11. 14:03 Market price with cost savings adjustment
12. 15:34 Opportunity cost transfer pricing approach
13. 20:39 Transfer pricing impact on divisional performance
14. 21:55 Case study: closure decision analysis

About this lesson

and ultimately whether the company makes optimal decisions. You'll explore the core objectives of transfer pricing: ensuring divisions are motivated to act in the company's best interest, maintaining fairness so both buying and selling divisions remain profitable, and enabling accurate performance evaluation. The lesson walks you through practical profit statements showing how changing a transfer price shifts profits between divisions without changing overall company profit—but can lead to poor decisions if not set carefully. The lesson covers four main transfer pricing methods. Cost-based approaches set prices at variable cost, full cost, or cost-plus a percentage, but these lack incentive for the selling division to control costs efficiently. Market-based pricing uses the external market price, adjusted downward for costs saved through internal transfer (like transport or packaging). Opportunity cost pricing is considered optimal: when the selling division has spare capacity, the opportunity cost is zero; when operating at full capacity, it's the lost contribution from other products. The lesson emphasises that an effective transfer price should encourage goal congruence—decisions that benefit the whole organisation—while giving divisional managers autonomy to negotiate within an acceptable range. Throughout, you'll work through realistic scenarios showing how transfer price choices affect divisional performance metrics, manager motivation, and strategic decisions like whether to close a division or source externally. Understanding these dynamics is essential for Strategic Business Leader (SBL), Advanced Performance Management (APM), and Performance Management (PM) papers.

Duration: 24m