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    Transfer pricing

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    Should the transfer be made?

    Assume the transfer should be made. At what transfer price?

    Please see attached for case.

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    Solution Preview


    The issue to be discussed is the transfer pricing. The transfer pricing is not only an accounting tool, rather it is a behavioral tool that motivate managers to make the right decisions, In particular the transfer price should be designed so that it accomplishes the following subjects:
    1. It should provide each segment with the relevant information required determining the optimum trade off between company costs and revenues.
    2. It should induce goal congruent decisions
    3. It should help measure the economic performance of the individual profit centers, here namely Castings and pipe.
    4. The system should be simple to understand and easy to administer.

    Should the transfer be made?
    Now the decision ...

    Solution Summary

    The solution discusses the concepts of transfer pricing in detail.