Market based and opportunity cost approach - part 3

In this lesson

1. 0:00 Transfer pricing fundamentals
2. 1:15 Maximum transfer price explained
3. 2:38 Net marginal revenue concept
4. 3:34 Transfer price range overview
5. 4:28 Worked example setup
6. 6:10 Calculating maximum price
7. 6:32 Calculating minimum price using opportunity cost
8. 7:53 Transfer price range conclusion

About this lesson

Transfer pricing becomes complex when divisions have autonomy and external options, so understanding the constraints on both sides of the deal is essential for exam success. You'll explore how receiving divisions set their maximum acceptable price by considering external market alternatives. If Division B can buy a component externally for £50 per unit, they won't pay more internally unless there's a compelling reason like superior quality. The video walks you through the practical logic: division managers protect their own financial performance and bonuses, so they'll always compare internal transfer prices against what they could pay outside the business. The lesson then brings these concepts together by establishing a transfer price range. You'll see how to calculate the minimum price a supplying division will accept using marginal cost plus opportunity cost, and the maximum price a receiving division will pay using external market prices. Working through a realistic example with two divisions, you'll discover how to find the acceptable range where both divisions benefit from trading internally rather than externally—a common exam scenario that tests your understanding of divisional autonomy and profit responsibility.

Duration: 8m