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Transfer Pricing and the Control of Internal Corporate Transactions
Author(s) -
Brickley James,
Smith Clifford,
Zimmerman Jerold
Publication year - 2020
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/jacf.12393
Subject(s) - transfer pricing , profitability index , variable pricing , marginal cost , control (management) , microeconomics , business , transfer (computing) , economics , industrial organization , finance , computer science , management , parallel computing , multinational corporation
One potential weakness of all divisional profitability schemes is their inability to capture synergies among business units. One way of managing this problem is to design a transfer pricing scheme that attempts to assign common costs and benefits to different business units. What makes transfer pricing both so interesting, and such a challenge, is that the solution involves finding a way to encourage divisional managers whose pay is likely to depend on such transfer prices to reveal their private or unbiased information about the firm's costs in a way that serves the interest of the rest of the firm. With that end in view, the authors provide a general analytical framework for setting transfer prices and go on to discuss the costs and benefits of each of the most common transfer‐pricing methods: (1) market pricing; (2) marginal cost pricing; (3) full‐cost pricing; and (4) negotiated prices.