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futurenurse15 futurenurse15
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When organizations choose to decentralize their operations, divisions may end up exchanging goods and services with one another rather than with external suppliers or customer. Since managers are evaluated based on how well their divisions perform, they want any transaction with another division to generate positive results.

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Discuss the four ways of determining a transfer price and explain the advantages and disadvantages of each.
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Managerial Accounting

Managerial Accounting


Edition: 4th
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mouallemjmouallemj
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The most unbiased transfer price is the market-based price, which is easily determined by monitoring similar trades that occur in the marketplace between unrelated parties. This is the price that the selling division would charge to other customers, and that the buying division would pay to other suppliers. Market-based prices are not always readily available. Without a market price to guide the transfer, the most appropriate price for the sale may not be used.

A second alternative is cost-based price, or the cost to produce the intermediate product. If the selling division is a cost center, this arrangement may be acceptable, but if the division is a profit center, the group's management will want to earn a profit on the sale.

To provide some level of profit to the seller, the selling and buying divisions may agree to a cost-plus price, in which some markup is added to the product's cost to arrive at the transfer price. The cost-based and cost-plus based transfer prices do not provide any incentive to the selling division to control costs. This method may work well for the selling division, but it may not be in the best interest of the corporation as a whole if the cost to produce the intermediate product is higher than it really should be.

The fourth option is negotiated price, or one that is agreed upon by both the buying and the selling division. Unlike a dictated cost-plus price, a negotiated price leaves the decision making to the division managers. This price might be agreeable, but it does not necessarily maximize income for the corporation.

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futurenurse15 Author
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A month ago
Helped a lot
megan.xo
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Yesterday
Smart ... Thanks!
Smair87
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2 hours ago
This helped my grade so much Perfect
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