In this case the policy of transfer pricing of Renoir is cost-based transfer price (full cost by 1.25) but its partner Company is suggesting a market-based price. In this specific case, negotiated transfer price seems the most convenient method because the seller party (Renoir) has no unused capacity (best reason to choose cost-based price) in fact, it will have to invest in a new line, additionally the seller party has no market for the product (best reason to choose market-based price) other than the purchase party (Europe), however, the purchase party has made it clear that there is no incentive for them to buy the deodorant for more than $2 per unit, because that is the market price of this product in France...
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The return on investment deodorant soap for the first year would be 6% and by year 5 would be 13% (because of accumulated depreciation), these figures barely satisfies Renoir's corporate target of 12%. Even though the deodorant product generates certain profit, the profit margin is quite low which might represent risk for Renoir given the fact that the company doesn't have a market for the remaining volume and any small increase in cost would represent loses...
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