Question: Question 2 PQR Plc is a multi-national company with different divisions trading in different countries around the world. There is trade in intermediate products between

Question 2

PQR Plc is a multi-national company with different divisions trading in different countries around the world. There is trade in intermediate products between a number of these divisions.

When transfers take place between divisions in different countries the transfer price is set by the Board of the parent company without discussing the price with the divisional managers. This is because the Board of PQR Plc wishes to be able to ensure that profits are made by the divisions situated in countries where the impacts of taxes are least. Only the Board has the resources to monitor the tax situation in all countries, so they impose the transfer prices on the basis of what is currently the most advantageous.

You are required to discuss the implications of the Board's policy.

Instead of imposing a transfer price, it has been suggested that the Plc use one of the following methods of determining a transfer price.

Full Cost (absorption cost)
Marginal Cost
Cost-plus a mark-up
Negotiated Price
Market Price
Cost Price

You are to evaluate the advantages and disadvantages of each method.

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