ACCT2002 Chap.13 Transfer Pricing, Decentralisation and Sustainability
Transfer Pricing, Decentralisation and Sustainability
Decentralisation gives subunit managers authority to use local information, but it also creates coordination and performance-evaluation problems. Transfer prices influence reported subunit profit, incentives, sourcing choices and tax exposure even though they do not create revenue for the organisation as a whole.
The course recap states three key properties of management control systems, four criteria for evaluating transfer prices and calculation under three methods, while naming market-based prices and full cost plus a mark-up. This chapter teaches standard method without presenting an uncited named triad as the University's list.
It derives the minimum transfer price from incremental cost plus opportunity cost, identifies the bargaining range with and without spare capacity, and connects control design to multinational and sustainability considerations.
What this chapter covers
- 01
Management control systems and their three key properties
- 02
Benefits and costs of decentralisation
- 03
Four criteria for evaluating transfer prices
- 04
Calculating transfer prices under three methods
- 05
Market-based prices and goal congruence
- 06
Full cost plus a mark-up
- 07
Minimum transfer price and opportunity cost
- 08
Range with unused capacity
- 09
Multinational tax considerations
- 10
Sustainability frameworks and measures
Derive a feasible transfer-price range
- 2With spare capacity, the opportunity cost of a transfer is zero. The seller's minimum is therefore the $38 incremental cost.
- 2The buyer's maximum is the $61 outside purchase price. The feasible range with spare capacity is $38 to $61 per part.
- 3At full capacity, each internal transfer displaces an external sale and sacrifices contribution of $64 − $38 = $26. The seller's minimum becomes $38 + $26 = $64.
- 2Because the buyer will pay at most $61, there is no mutually acceptable range at full capacity; the organisation is better served by the external sale and outside purchase if quality and other terms are equivalent.
- 1The transfer price redistributes reported profit between divisions but does not change the organisation's total profit for a given sourcing choice.
Key terms
- Decentralisation
- Delegation of decision authority to managers of subunits.
- Transfer price
- The amount charged for a product or service transferred between subunits of the same organisation.
- Goal congruence
- Alignment of a manager's preferred action with the action that benefits the organisation as a whole.
- Minimum transfer price
- Incremental cost of transfer plus the opportunity cost of resources used.
- Opportunity cost of capacity
- Contribution forgone when an internal transfer displaces external business or another use.
- Full cost plus mark-up
- A transfer price built from allocated full cost with an added margin; its incentive effects depend on the cost base.
- Sustainability measure
- A financial or non-financial indicator used to track environmental or social resource use and outcomes.
Transfer Pricing, Decentralisation and Sustainability FAQ
Does a transfer price change total organisation profit?
The price itself reallocates profit between subunits. The sourcing decision it induces can change total profit if it affects external sales, purchases, quality, tax or capacity use.
Why is market price often informative?
In a competitive market it reflects external alternatives for both buyer and seller, supporting autonomy and goal congruence when products and terms are comparable.
What is wrong with full cost plus a mark-up?
It can pass inefficiency to the buyer, reward a higher cost base and obscure avoidable cost. It may still be used for stability or policy reasons, but its incentives must be evaluated.
How should sustainability enter management control?
Measures should connect strategy, operational responsibility and verifiable outcomes. A score without decision rights or a defined boundary can encourage symbolic compliance rather than resource improvement.
Exam move
Draw separate organisation-wide and divisional views. Calculate incremental cost, opportunity cost, seller minimum and buyer maximum before discussing a method. Change the capacity assumption and watch the range move. When using full cost, identify which allocations a manager can influence. For sustainability, define the measure's boundary, owner and behavioural consequence.
In oral practice, explain why a transfer price can be divisively important while leaving consolidated revenue unchanged.
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