Q. What do you mean by Dual pricing?
Dual transfer pricing means setting one transfer price for the internal seller and another transfer price for the internal buyer. The basic idea is to encourage trade by creating the most beneficial price for both parties.
- Internal seller: The transfer price received would be set at the external market price e.g. the price that would normally be charged to external customers.
- Internal buyer: The transfer price paid would be set at the sellers variable (marginal) cost of production.
The difference between the two transfer prices would need reconciling by head office when preparing the group consolidated financial results. Dual pricing is a similar approach to the opportunity cost approach which is discussed later.