Transfer Pricing Issues When transfer prices are based on actual cost, a supplying division oftenhas no incentive to reduce cost. For example, a design change that would reduce the supplying division’s manufacturing cost would benefit only downstream divisions if the transfer price is based on amarkup over cost.Required What can or should be done to provide the supplying division an incentive to reduce manufacturing costs when the transfer price is cost-based?
Transfer Pricing Issues When transfer prices are based on actual cost, a supplying division oftenhas no incentive to reduce cost. For example, a design change that would reduce the supplying division’s manufacturing cost would benefit only downstream divisions if the transfer price is based on amarkup over cost.Required What can or should be done to provide the supplying division an incentive to reduce manufacturing costs when the transfer price is cost-based?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transfer Pricing Issues When transfer prices are based on actual cost, a supplying division often
has no incentive to reduce cost. For example, a design change that would reduce the supplying division’s manufacturing cost would benefit only downstream divisions if the transfer price is based on a
markup over cost.
Required What can or should be done to provide the supplying division an incentive to reduce
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