Assignment 6b Scenario Essay Example | Topics and Well Written Essays - 750 words

Assignment 6b Scenario - Essay Example This approach is generally favorable to a manufacturing division but not for a retail division. The second approach is the negotiated price approach. In this approach, a manufacturing division and a retail division both negotiate a price. The price of a product is set so that all of the variable costs of the manufacturer are covered and the price is lower than the market price, but the manufacturer still makes a profit. This method is commonly used when a manufacturing division has unsold inventory, as it can still sell products by using this method. This method is also more favorable to the retailer than the market price approach. The final approach is the cost price approach. In this method, a product is sold to the retail division at its standard cost or its actual cost. This price may even not be enough to cover all of the expenses of the manufacturing division. This method is the most profitable for the retail division, and it is unlikely to be supported by anyone in charge of manufacturing unless there is low demand for the manufacturer’s product or a massive amount of excess capacity at the manufacturer’s facility. There are several reasons why market price approach is the transfer pricing approach that should be used for Pharmafin’s new modules. One of the modules will be produced internally, and to produce it, the company’s production facilities will need to add new equipment. Production staffing also needs to be increased by ten percent. These large expenditures will make it necessary to use the pricing method that causes the company to receive the highest price so that it can cover the new expenditures. The marketing department shows that there is a high level of consumer demand for the new machinery. Because of this, the new machinery should sell even if it is sold at a higher price. The other two pricing approaches could lead to a lower price, but they might also lead to revenues that are inadequate to cover