Limitations of Negotiated Transfer Pricing

Limitations of Negotiated Transfer Pricing

Under this method transfer prices between department and division are decided on the bases of negotiation between these departments. This type of pricing is regarded as fair deal, because both parties are satisfied.

1.    Conflict

First limitation of negotiated transfer pricing is conflict creation  between departments. failed negotiation between departments may result in conflict. This conflict situation is not favorable for organization, because conflict may bring disintegration within the organization.

2.    Use of Domination

Under negotiated pricing, the powerful or dominating division may influence the transfer price in its favor; therefore the advantage of fair deal may not be achieved in such circumstances.

3.    Time Consuming Job

Negotiation pricing is a time consuming effort and  would consume a lot time of management. This time can be used on an issue which can bring real profit to the organization.

4.    No Real Benefit

Negotiated pricing will not bring any real advantage or benefit to the organization because transfer pricing is just a method of measuring performance of divisional performance. It has no direct role in improving the profitability of organization.