Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 11

Alpha Division and Beta Division are both profit centers. Alpha has no external markets for its one product, an electrical component. Beta uses the component but cannot purchase it from any other source. What transfer pricing system would you recommend for the interdivisional sale of the component? Why?

Step 1 of 2

Transfer pricing

Transfer pricing is the amount charged by one business unit of a company to another business unit for the products supplied. Each business unit is considered as separate responsibility centers and sale from one business unit to another business unit is consider as sale to an outsider. The sales based on transfer pricing are recorded in the accounting books of a firm and transfer prices are used for decision making, merchandise costing and performance assessment.