Chapter 11part2

Chapter 11part2 - Chapter11 PartII KeyConcepts/Definitions...

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    Chapter 11 Part II
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Key Concepts/Definitions A transfer price is the price charged when one segment of a company provides goods or services to another segment of the company. The fundamental objective in setting transfer prices is to motivate managers to act in the best interests of the overall company .
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Three Primary Approaches There are three primary approaches to setting transfer prices: 1. Negotiated transfer prices 2. Transfers at the cost to the selling division 3. Transfers at market price
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Negotiated Transfer Prices A negotiated transfer price results from discussions between the selling and buying divisions. Advantages of negotiated transfer prices: 1. They preserve the autonomy of the divisions, which is consistent with the spirit of decentralization. 2. The managers negotiating the transfer price are likely to have much better information about the potential costs and benefits of the transfer than others in the company. Upper limit is determined by the buying division. Lower limit is determined by the selling division. Range of Acceptable Transfer Prices
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Harris and Louder – An Example Imperial Beverages: Ginger beer production capactiy per month 10,000 barrels Variable cost per barrel of ginger beer £8 per barrel Fixed costs per month £70,000 Selling price of Imperial Beverages ginger beer on the outside market £20 per barrel Pizza Maven: Purchase price of regular brand of ginger beer £18 per barrel Monthly comsumption of ginger beer 2,000 barrels Assume the information as shown with respect to Imperial Beverages and Pizza Maven (both companies are owned by Harris and Louder).
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This note was uploaded on 12/31/2011 for the course ACCT 441 taught by Professor Johnvermeer during the Spring '08 term at Humber.

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Chapter 11part2 - Chapter11 PartII KeyConcepts/Definitions...

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