Dual pricing and two part tariffs
Taught by Nick Drape · AI tutor support included
In this lesson, you'll learn how dual pricing and two-part tariffs solve a common transfer pricing problem: motivating the supplying division when they have spare capacity. These are two different approaches that head office can use to make internal transfers fair and incentivise both divisions to cooperate.
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In this lesson
- 0:00 Opportunity cost approach to transfer pricing
- 1:09 Dual pricing: keeping both divisions happy
- 3:06 Two part tariff: fixed fee solution
- 4:31 Dual pricing exam question walkthrough
- 7:18 Two part tariff disadvantages explained
About this lesson
Dual pricing works by letting each division see a different transfer price. The supplying division recognises the external market price (so they get rewarded), whilst the receiving division only pays marginal cost (so they get a bargain). The difference is reconciled in a central management account. A two-part tariff takes a different approach: transfers happen at marginal cost, but the receiving division also pays a fixed fee each period to the supplying division. This fixed fee is the reward that keeps the supplying division motivated. You'll work through practical examples identifying which statements correctly describe how each method works, and explore why each approach has trade-offs. Understanding when and why to use these methods is essential for Performance Management and Strategic Business Leader papers, where transfer pricing decisions directly affect divisional performance and motivation.
Duration: 10m
Transcript
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