Question

Transfer pricing is a contentious issue for almost any company where divisions buy from or sell to each other. Stated another way, transfer pricing causes more conflict between divisions than almost any other issue.

What is you experience or knowledge about this issue? How do you suggest that it be resolved?

Answer 1

What is you experience or knowledge about Transfer pricing issue?

The transfer pricing refers to exchange of goods between the divisions at a price known as transfer price. The transfer price is usually fixed in advance by top management so that there is no conflict on price at a later date. The transfer price fixed should be a win-win situation for both the departments. The price fixed many a times results in loss to a particular department as a result the performance evaluation does not show a true picture. Further many companies allow their department to be independent by allowing them to fix their price depending on market demand and even selling the output fully outside rather than internally

How do you suggest that it be resolved?

The transfer pricing issue can be resolved by following steps

1. Fixing the mechanism to derive transfer price in advance
2. Consensus of both the department over transfer price
3. Allowing both the departments the freedom to sell their product outside if they are getting a better price
4. Healthy negotiations and discussions