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- 3 Marks
Question
When negotiated transfer prices are used in the company, the managers who are involved in the proposed transfer within the company meet to discuss the terms and conditions of the transfer. They may decide not to go through with the transfer, but if they do, they must agree to a transfer price.
Required:
Explain THREE (3) limitations of negotiated transfer prices. (3 marks)
Answer
Negotiated transfer prices suffer from the following limitations:
- The transfer price which is the final outcome of negotiations may not be close to the transfer price that would be optimal for the organisation as a whole since it can be dependent on the negotiating skills and bargaining powers of individual managers.
- They can lead to conflict between divisions which may necessitate the intervention of top management to mediate.
- The measure of divisional profitability can be dependent on the negotiating skills of managers who may have unequal bargaining power.
- They can be time-consuming for the managers involved, particularly where large numbers of transactions are involved.
(Any 3 points for 3 marks)
- Tags: Divisional Performance, Limitations, Negotiation, Transfer Pricing
- Level: Level 2
- Topic: Transfer Pricing
- Series: MAY 2019
- Uploader: Joseph