Managerial Economics

Transfer Pricing

The profit center model treats a corporate division as if it were an autonomous business within a business. However, often the reason for having multiple divisions in an enterprise is because there is vertical integration, meaning that some divisions are providing goods and services to other divisions in the enterprise. If the two divisions in an exchange are to be treated as if they were separate businesses, what price should be charged by the supplying division? Even if there is no actual cash being tendered by the acquiring division, some measurement of value for the exchange is needed to serve as the revenue for the selling division and the cost for the acquiring division. The established value assigned to the exchanged item ...