Week 9 Flashcards
How does transfer pricing create internal tension inside a company?
One division wins when another division loses in terms of price.
Why is it necessary to set transfer prices?
Remember responsibility centers—some are responsible for profit.
If an internal division is a responsibility center, and if it can sell to internal divisions and to external purchasers, it would not want to provide to the internal divisions without receiving a price for what it provides.
Why is it helpful to internal divisions to have transfer prices?
It can increase demand—makes use of otherwise unused capacity.
It can thereby increase an internal division’s profit.
This at the same time prevents outside suppliers from grabbing market share and becoming more of a threat to the internal division.
