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sir in the pricing topic it is suggested that customer-based pricing and competiton-based pricing drive a firm to maximise profits. But under transfer pricing it is suggested that cost-plus pricing is the scheme which encourages divisions to utilise their spare capacity instead of usual external market price(or competition -based pricing as we might put it).
although slightly different scenarios, i think the fundamentals should remain the same, which does not seem to be the case.
would you mind clarifying my doubt sir?
The fundamentals remain the same for the company as a whole selling externally. Transfer pricing is simply deciding what price one division should sell to another if the divisions are going to be measured on profitability. The transfer price makes no difference whatsoever to the profit of the company as a whole if head office dictates what is produced and transferred. That is why the exam focus is on deciding on a sensible transfer price that motivates managers to do what is best for the company without having to be ordered what to do i.e. goal congruence.
Have you actually watched my free lectures on transfer pricing?
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