TRANSFER PRICING.

Abstract

Most large multiproduct companies have found it necessary to decentralize operations into somewhat homogeneous, manageable segments. Along with delegated authority has gone responsibility for costs, sales and profits. Inevitably, this entails the establishing of internal 'prices' for products transferred between divisions. The procedures for doing this are always controversial, and transfer prices are frequently established in a way that actually subverts corporate goals, whether such prices are arrived at through negotiations between divisional managers or set by formula. A formula method for establishing transfer prices of intermediate products is proposed in which profit centers are assigned equal returns on the replacement value of investments.