ACCA F5考試：TRANSFER PRICING(二)

No spare capacity

If the seller doesn’t have any spare capacity, or it doesn’t have enough spare capacity to meet all external demand and internal demand, then the next question to consider is: how can the opportunity cost be calculated? Given that opportunity cost represents contribution foregone, it will be the amount required in order to put the selling division in the same position as they would have been in had they sold outside of the group. Rather than specifically working an 'opportunity cost' figure out, it’s easier just to stand back and take a logical approach rather than a rule-based one.

Logically, the buying division must be charged the same price as the external buyer would pay, less any reduction for cost savings that result from supplying internally. These reductions might reflect, for example, packaging and delivery costs that are not incurred if the product is supplied internally to another division. It is not really necessary to start breaking the transfer price down into marginal cost and opportunity cost in this situation.

It’s sufficient merely to establish:

(i) what price the product could have been sold for outside the group

(ii) establish any cost savings, and

(iii) deduct (ii) from (i) to arrive at the minimum transfer price.

At this point, we could start distinguishing between perfect and imperfect markets, but this is not necessary in Paper F5. There will be enough information given in a question for you to work out what the external price is without focusing on the market structure.

We have assumed here that production constraints will result in fewer sales of the same product to external customers. This may not be the case; perhaps, instead, production would have to be moved away from producing a different product. If this is the case the opportunity cost, being the contribution foregone, is simply the shadow price of the scarce resource.

In situations where there is no spare capacity, the minimum transfer price is such that the selling division would make just as much profit from selling internally as selling externally. Therefore, it reflects the price that they would actually be happy to sell at. They shouldn’t expect to make higher profits on internal sales than on external sales.

Maximum transfer price

When we consider the maximum transfer price, we are looking at transfer pricing from the point of view of the buying division. The question we are asking is: what is the maximum price that the buying division would be prepared to pay for the product? The answer to this question is very simple and the maximum price will be one that the buying division is also happy to pay.

The maximum price that the buying division will want to pay is the market price for the product – ie whatever they would have to pay an external supplier for it. If this is the same as the selling division sells the product externally for, the buyer might reasonably expect a reduction to reflect costs saved by trading internally. This would be negotiated by the divisions.

2. Where there is no external market for the product being transferred

Sometimes, there will be no external market at all for the product being supplied by the selling division; perhaps it is a particular type of component being made for a specific company product. In this situation, it is not really appropriate to adopt the approach above. In reality, in such a situation, the selling division may well just be a cost centre, with its performance being judged on the basis of cost variances. This is because the division cannot really be judged on its commercial performance, so it doesn’t make much sense to make it a profit centre. For the purposes of Paper F5, the syllabus does not require you to consider this situation in any level of detail. Suffice to say that a transfer price would just have to be negotiated using whatever figures were available if the selling division was not simply a cost centre.