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Transfer Pricing as a Substitute for a Market Price

How much faith can a manager place in a transfer price as a substitute for a market price in measuring a profit center's performance? Provide a short discussion with supporting reasons and examples.

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The response address the queries posted in 609 words with references.
//Transfer pricing has gained greater importance these days. In the following part, I have given a brief explanation of what is transfer pricing and how it can be beneficial to the Organizations.//

When products and services are transferred from one profit center to one more profit center within the company, on which value this movement of goods or services is done is as transfer pricing. For one profit center (responsibility center furnishing or selling the product) this turn out to be "sales revenue" while for the other profit center (responsibility center receiving the product) it is "cost of goods sold." The main reason behind designing a transfer pricing system is "goal congruence."

Transfer pricing is an arbitrary pricing of exports and imports that may be greater than, or less than, the arm's length price. It is basically the pricing of intra-corporate transactions. When open market exists, arm's-length price is normally ...

Solution Summary

Transfer pricing has gained greater importance these days. In this solution, I have given a brief explanation of what transfer pricing is and how it can be beneficial to an organization. This solution is 609 words with references.

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