Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 56

Transfer-Pricing Issues When transfer prices are based on actual cost, a supplying division often has no incentive to reduce cost. For example, a design change that would reduce the supplying division’s manufacturing cost would benefit only downstream divisions if the transfer price is based on a markup over cost.

Required What can or should be done to provide the supplying division an incentive to reduce manufacturing costs when the transfer price is cost-based?

Step 1 of 2

Transfer price

Transfer price refers to price at which goods are sold from one department to another department. There are number of methods and policies used by company within the department in order to determine the price to be charge for intercompany sales.