Definition
Negotiated Transfer Prices are prices used for transactions of goods or services exchanged between divisions within the same organization that are set through negotiations. These prices are often adopted when there are imperfections in the external market that prevent the determination of a fair transfer price or when standard pricing mechanisms fail to reflect the true economic value of intra-organizational transfers.
Examples
Example 1: Technology Production Division The technology production division of a corporation manufactures specialized components. The marketing and sales division needs these components for product assembly. Given the absence of a robust external market for these specialized components, both divisions negotiate a transfer price, considering production costs and estimated market potential to settle on terms beneficial for both.
Example 2: Food and Beverage Corporation In a large food and beverage corporation, the beverage manufacturing unit produces a unique ingredient used exclusively by the dessert division in their product line. With limited external benchmarks, the two divisions negotiate a transfer price that approximates the ingredient’s value, factoring in production costs and desired profit margins.
Frequently Asked Questions
Q1: What factors influence the negotiated transfer price?
- A1: Factors include production costs, market conditions, desired profit margins, dependency of the receiving division, relative bargaining power, and potential use of a mediator.
Q2: Why use negotiated transfer prices?
- A2: Negotiated transfer prices are used to ensure fairness and maintain harmony between divisions when market conditions are imperfect or non-existent, thus reducing potential conflicts.
Q3: Can negotiated transfer prices affect tax liability?
- A3: Yes, the prices may affect the overall tax liability of the organization, especially in multi-national companies operating in different tax jurisdictions.
Q4: How is bargaining power relevant in transfer price negotiation?
- A4: The relative bargaining power determines how much leverage each division has in the negotiation process, often influencing the final agreed-upon transfer price.
Q5: Are there alternatives to negotiated transfer prices?
- A5: Yes, other methods include market-based transfer prices, cost-based transfer prices, and adjusted market prices.
Related Terms
Transfer Pricing The practice of setting prices for transactions between controlled or related legal entities within an enterprise.
Market-based Transfer Pricing Transfer prices set based on prevailing external market rates for similar goods or services.
Cost-based Transfer Pricing Setting transfer prices based solely on the cost of producing the good or service, either at full cost or variable cost.
Bargaining Power The relative power of parties involved in a negotiation, influencing the outcomes based on their relative strengths and dependencies.
Mediators Neutral third parties that help resolve disputes or facilitate negotiations between divisions or parties.
Online Resources
- Investopedia: Transfer Price
- Corporate Finance Institute: Transfer Pricing
- OECD: Transfer Pricing Guidelines
Suggested Books for Further Studies
- “Transfer Pricing Methods: An Applications Guide” by Robert Feinschreiber
- “Transfer Pricing and Corporate Taxation: Problems, Practical Implications, and Proposed Solutions” by Elizabeth King
- “International Taxation and the Extractive Industries” by Philip Daniel
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