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    How transfer pricing impacts performance measures

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    Please comment on transfer pricing issues and measures for performance evaluations and the importance of these issues, how they are related and why they are very important in the business environment.

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    Solution Preview

    Transfer prices are tough...see if this helps.

    Transfer pricing can be very beneficial, especially in decentralized firms, because it permits separate units to operate as their own entrepreneurial unit. This provides a training ground and way to stay connected to local customers by buying what the local manager believes is needed. But when units sell to each other, they may charge prices that create some suboptimal activity. When units in the same firm sell to each other, they create "fake" profits. That is, one unit has profit and the receiving unit has expense, but the total firm has not gotten richer or poorer. The profit in ...

    Solution Summary

    Your examples is 334 words and shows an example of how a decentralized firm can be worse off with transfer pricing.