Transfer pricing basics

In this lesson

1. 0:00 Transfer pricing in large organisations
2. 0:54 Basic structure: supplying and receiving divisions
3. 2:19 Real-world example: bicycle manufacturing
4. 3:40 Transfer price impact on internal accounts
5. 4:22 OH Engineering case study setup
6. 5:07 Calculating transfer price with cost-plus markup
7. 7:09 Make-or-buy decision framework
8. 9:15 Saving by making calculation

About this lesson

This lesson covers how transfer prices work when divisions trade internally, explores real-world examples like Starbucks and Amazon, and walks you through calculating whether it's better for an organisation to make a component internally or buy it externally. By the end, you'll understand how transfer pricing affects divisional performance and organisational profitability—essential knowledge for PM and management accounting papers. Transfer pricing occurs when different parts of a large organisation trade with each other. The supplying division produces an intermediate product (like a component) and transfers it to the receiving division, which adds further value and sells the final product to external customers. A transfer price is attached to this internal transfer, creating internal revenue for the supplier and internal cost for the receiver—but these figures only affect management accounts, not the organisation's external financial statements. This video uses a practical worked example to show you how to evaluate make-or-buy decisions. You'll see how to calculate the "saving by making"—comparing the incremental cost of producing a component internally against the cost of buying it from an external supplier. Understanding this concept is crucial because transfer pricing directly influences whether divisional managers make decisions that benefit the whole organisation or just their own division, making it a key consideration in performance appraisal and strategic decision-making.

Duration: 11m