Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 8

What are the advantages and disadvantages of a negotiated transfer price system?

Step 1 of 2

TRANSFER PRICING; ADVANTAGE AND DISADVANTAGE OF NEGOTIATED PRICE SYSTEM

Advantages

Under the negotiated price system, managers of both the buying and the selling division come to the table and negotiate the price. This paves the way for many advantages to the company as well as to their respective division.

1. The first advantage is that manager knows what they want and conditions in which they are operating. Hence any solution come out of this is generally more practical and executable than any decision imposed by higher management.

2. Top manager will have more time to focus on some other vital issues than to spending time on local within company pricing issues.

3. Manager’s motivation gets a boost. Because this makes them to take care of the interest of their division.

4. This decision making makes the manager more experience and prepare the future for the company.