ACCA Strategic Professional · Advanced Financial Management · Dividend policy in multinationals and transfer pricing
Which transfer pricing basis is most likely to encourage a selling division manager to behave in a way that maximises overall group profit when an efficient external market exists for the product and there is no capacity constraint?
Market price adjusted for savings such as avoided selling and distribution costs works best, because it reflects the opportunity cost of the transfer. It supports goal congruence and fair divisional performance measurement, unlike full cost plus markup or variable cost bases.
- AMarket price, adjusted for savings in selling and distribution costsCorrect
- BFull cost plus a fixed markup
- CStandard variable cost only
- DNegotiated price fixed annually by head office irrespective of market
Explanation
With a competitive external market, market price (less internal savings) reflects opportunity cost and gives goal congruence while preserving divisional autonomy. Full cost plus markup can induce wrong decisions, and variable cost gives the seller no incentive to supply.
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