Chapter 6 Transfer Pricing

Management Control Systems

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Chapter 6 Transfer Pricing Summary: Delegating authority depends on the ability to delegate responsibility for profits. Profit responsibility cannot be safely delegated unless 2 conditions exist: 1. The delegatee has all the relevant info needed to make optimum profit decisions. 2. The delegatee’s performance is measured on how well he or she has made cost/revenue trade-offs. Where segments of a company share responsibility for product development, manufacturing and marketing, a transfer price system is required if these segments are to be delegated profit responsibility. This transfer price system must result in 2 conditions just described. In complex organizations, devising a transfer price system that ensures the necessary knowledge and motivation for optimum decision-making can be difficult. Two decisions are involved in designing a transfer price system. First is the sourcing decision: Should the company produce the product inside the company or purchase it from an outside vendor? Second is the
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