Optimal Transfer Pricing Method and Fixed Cost Allocation

Abstract

Prior empirical research on transfer pricing only reported what firms d o but seldom explained why. This study moves the research forward by introducing hypothesis testing.Atkinson ( 1987) shows that pricing transfers at variable cost when capacity is in excess. as prescribed by economic theory. would induce the buying unit to overstate expected demand at the capacity planning stage and cause a waste of resources. To test whether the strategic issue affects transfer pricing decisions, the study compares pricing methods for longterm transfer situations. which were provided for at the capacity planning stage, and ad hoc transfers. which were not. The result: long-term transfer relationships are indeed less likely to be priced at variable cost than are -ad hoc transfers.As well. while the two-step method of charging full cost -charging variable cost for each unit transferred and separately charging a flat fee each period for capacity on reserve -has many good control qualities, it remained just an academic curiosity: there was no evidence of its wide use among firms. This study finds that the two-step method is as widely in use as the one-step method -charging variable cost plus unit fixed costs for each unit transferred.

Cost-based transfer pricing under R&D risk aversion in an integrated supply chain

“…In such environments, variable-cost transfer pricing becomes superior, even though previous surveys report that variable-cost transfer pricing is rare in practice (Tang, 1992(Tang, , 2002. Indeed, Shih (1996) provides empirical evidence that the two-step transfer pricing method is frequently used, namely, both of the costing methods are separately employed for short-term transfer pricing and longterm transfer pricing. Our results suggest that firms should also use the two methods separately according to the degree of risk with an investment opportunity.…”

Dynamic transfer pricing under conditions of uncertainty – the use of real options

“…Finally, within the cost-based methods, the issue of idle capacity, investments in yet-to-productive plant and equipment and demand forecasts become important. Conventional economic theory suggests that the long-term optimal transfer price is either variable cost or market value depending on whether the supplier has idle capacity (Shih, 1996). The purchaser still has an incentive to overstate demand at the planning stage, in these circumstances, if he or she knows that the seller has idle capacity.…”

Preço de transferência em empresas exportadoras brasileiras: adoção para avaliação de desempenho financeiro de divisões

“…Joice Denise Schafer, Valdirene Gasparetto, Luis Felipe Ferreira A investigação dos fatores que levam as organizações a optarem por determinado método de precificação interna, partem, em sua maioria, do pressuposto de que fatores ambientais e organizacionais, tais como grau de descentralização (Borkowski, 1990(Borkowski, , 1992Holmstrom & Tirole, 1991;Kouser et al, 2012),, tecnologia (Adler, 1996;Dikolli & Vaysman, 2006), estratégia de diversificação e integração da empresa (Eccles, 1985;Spicer, 1988;Borkowski, 1990;Adler, 1996;Kouser et al, 2012), tamanho da empresa (Borkowski, 1990(Borkowski, , 1992(Borkowski, , 1996Kouser et al, 2012), além de fatores externos à organização como ameaças, incerteza e estabilidade do ambiente (Borkowski, 1990(Borkowski, , 1992, dentre outros (Mahenthiran, Greenberg, & Greenberg, 1993;Shih, 1996;Kachelmeier & Towry, 2002;Ghosh, 2006;Chang et al, 2008;Bhattacharjee & Moreno, 2017), influenciam na definição do método de preço de transferência, entretanto, não há comprovação de que tais variáveis são de fato determinantes na adoção deste instrumento.…”