erve all of the [objectives of transfer pricing]. This is true, but there is one fairly straightforward principle which can be used to identify optimal transfer prices in many cases. [16] This principle is as follows: transfer price should be equal to the marginal cost of producing the transferred product or service, plus the opportunity cost of making the transfer. (The opportunity cost arises because of the fact that if a product is transferred from the SD to the BD, then the SD loses the opportunity to earn some profit margin by selling the product to an external customer). reasons for this principle, and its practical implications, will become clear as we review a series of four transfer pricing scenarios in this section. These examples are all based on a hypothetical company called Cristal Ltd. Ltd. is a thermoelectric company with many years experience in research and development of thermoelectric products including thermoelectric materials and modules. Crystal Ltd. is a leading company in Crystal group of companies. Our company generally recognized as an expert in manufacturing of Bi2Te3 thermoelectric elements and high quality thermoelectric modules. has a complete production cycle: from scientific and engineering development of perspective products to their mass production. It supplies various types of thermoelectric modules and elements for many special, industrial, automotive and consumer applications. [18] company has a Molten Glass Division, and the following is a summary of that division s activities last year: company also has a Glass Bottles Division, which needs 10,000 tons of molten glass per annum in order to manufacture its bottles. At present, however, the Glass Bottles Division buys all of its molten glass from an external supplier at a price of? 105 per ton. , Since the Molten Glass Division produces something which the Glass Bottles Division needs, the possibility of these two divisions doing some business with each other should at least be considered. Let s look at a number of possible scenarios. 1: No spare capacity in the Molten Glass Division means that the Molten Glass Division cannot increase its output above the level of 40,000 tons per annum which it is already producing (and selling to external customers)., If any tons of molten glass are sold to the Glass Bottles Division, then there will have to be a corresponding reduction in the quantity sold to external customers. Applying the principle set out earlier, the Molten Glass Division will want to set the transfer price as follows:
Marginal cost of producing molten glass =? 65 per ton.
Opportunity cost of making the transfer=lost contribution from foregoing the sale to the external customer=[? 120 selling price -? 65 marginal cost] =? 55 per ton.
Hence: Transfer price=[Marginal cost incurred up to the point of transfer] + [Opportunity cost of making the transfer] =? 65 +? 55 =? 120 per ton. Molten Glass Division will not want to transfer their product for less than? 120, since to do so would reduce the division s profits., The Glass Bottles Division will not be willing to pay this price, or indeed any price higher than the? 105 which they are currently paying to the external division. Therefore the two divisions will not be able to agree on a transfer price, and will not want to trade with each other. can show that this outcome is goal congruent (ie, it ...
