Points to stress Interdivisional transfers (and transfer pricing) area major source of suboptimal decisions. The selling division wants a high price, but the buying division wants a low price. If both divisions act in their own best interests, their decisions will sometimes hurt the company as a whole. Teaching tips Help students organise the transfer-pricing (TP) concepts by outlining a series of questions managers must address. The first is a policy question – should divisions be permitted to source externally, when internal goods are available The second is an operational question – at what price will the transfer be made This second question involves deciding (1) Which type of TP method will be used (market, cost or negotiated (2) How is the exact TP determined once the method is selected (3) How are disputes resolved (negotiation, arbitration or directives Ideally, a transfer price should 1 Promote goal congruence (managers and organisation’s interests are aligned so that selecting an action in a manager’s best interest is also in the organisation’s best interest 2 Motivate sellers to hold down costs and buyers to use inputs efficiently 3 Allow subunit managers the autonomy to make their own decisions (if the company is decentralised. As you cover each transfer-pricing method, ask students how well the method satisfies each of these three criteria. It should become apparent that no single method consistently satisfies all three criteria.
