Points to stress TP is most likely to be a problem when the seller is a profit or investment centre. If the seller is a cost centre, there is lessor no) incentive to maximise sales revenue and the potential for TP conflicts is thus reduced. TP allocates profits to subunits for (1) performance evaluation and (2) motivation. Profits are not allocated for product-costing purposes because product costs do not include a profit component. Market-based transfer prices Points to stress In perfectly competitive markets, market price represents the product’s fair market value. With market-based TP, profits approximate those that would occur if each subunit were freestanding. However, some products do not have perfectly competitive markets market processes are not always available and a single market price may not exist. Moreover, if the seller has idle capacity, they maybe willing to sell at a price above outlay cost, but below the market. Finally, if prices are temporarily depressed, it is not clear that the temporary windfall should accrue to the buyer at the expense of the seller.
