Dual Transfer Pricing Approach

A transfer price is the price charged between related parties in an intercompany transaction. For instance, the price the parent company asked in payment for the exchange of products or services supplied to its controlled foreign corporation (McKinley and Owsley, 2013). Its purpose is to bring best decision-making in an company (Transfer Pricing, 2015). The predetermined market transfer price for a product is not the best as it is derived from the evaluation for identical products that are available on the market. Thus, the transfer price can fluctuate vastly and swiftly depending on the changes in the demand and supply of the products. Furthermore, the market-based transfer price is capable of inducing the selling division from disregarding

Generally, organizations adopt this approach to avoid issues concerning the other approaches listed (Transfer Pricing, 2015). Nevertheless, dual transfer pricing approach has it downsides as due to the manager of selling division’s insufficient incentive for control and confusion in terms of the level of decentralization. An example of dual transfer pricing approach will be for the selling division to receive a mark-up added to the total cost on every transaction while the buying division is being charged at the marginal cost of the transfers.

Among the transfer pricing strategies mentioned earlier, the following situations substantiate an organization’s adoption of dual transfer pricing and negotiated transfer pricing approaches. Under dual transfer pricing approach, the selling division sells to the buying division at full cost plus profit amounted to €18.70 per barrel of crude oil. The buying division purchases from the selling division at the cost of market price amounted to €18 per barrel of crude oil as in assumption of if the buying division purchases from outside supplier, the price is €18 per barrel of crude

They are known as goal congruence, performance evaluation, autonomy and motivation. Goal congruence is one key success factor if an organization is to achieve its goals; including profitability (Harrington, 2007). In terms of promoting goal congruence, the transfer price is advantageous to the well being of the organization to achieve practicality for performance evaluation together with profit maximization as it can have a material impact on a company’s financial statements regardless of the organizarion’s size and style (McKinley and Owsley, 2013). Additionally, the transfer price sustains a high level of autonomy for divisional managers in decision-making so as to enhance managerial motivation as (Sisodia and Das, 2013) stated that besides improving motivation, autonomy is also a key to the success of the organization. In an organization, many foreign affiliates are considered as profit centers and the managers’ monetary rewards such as bonus are extremely dependent on the profit of their subsidiaries. Henceforth, the overall transfer pricing motivates managers and monitors the performance of the subsidiary (Eden and Smith,