ICAEW BIP · Chapter 5 · Question 5 of 9
If the buying and selling divisions are in the same tax jurisdiction, how does an increase in the transfer price for a component traded between them affect total group profit?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Group profit is unchanged; profit is simply moved from the buying division to the selling division
Explanation
A transfer price is revenue for the selling division and an equal cost for the buying division, so it cancels out on consolidation. Changing it only reallocates profit between divisions, provided the volume traded and decisions taken stay the same. Group profit can be affected indirectly if the price changes managers' decisions, or where different tax rates apply.
More Transfer pricing MCQs
- Q7A group sets transfer prices at full cost plus 20%. The full cost of a component is £34 per unit. What is the transfer price?
- Q8Division X sets a transfer price of £60 per unit for a component it makes for Division Y. Division X has spare capacity, and its variable…
- Q9Under a dual pricing system for transfers between divisions, what happens?
- Q1Which of the following is a main objective of a transfer pricing system in a divisionalised company?
- Q2Division A makes a component with a variable cost of £26 per unit and a fixed cost of £8 per unit. It sells the component externally for…