Page 3 - PowerPoint Presentation
P. 3
TRANSFER PRICING
Introduction
• Business divisions often supply goods and services to
other business divisions within the same company. A
price must be established for such a transfer (this is known
as a transfer price).
• The determination of a transfer price becomes particularly
important when the divisions are decentralised
(autonomous) and managers are going to be evaluated
based on their divisions performance. The selling division
would like the transfer price to be as high as possible (to
maximise their profits) whereas the buying division would
like the transfer price to be as low as possible (to
maximise their profits).
• The fundamental objective in setting a transfer price is to
motivate managers to act in the best interests of the
overall company (goal congruency).
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