Transfer Pricing for Aligning Divisional and Corporate Decisions Harvard Case Solution & Analysis

Discussions on transfer pricing is usually assumed target firm is to maximize profits at the optimal use of existing assets. This article is different from studying the effect of transfer pricing on the decision of the city budget. In decentralized firms, the decision to invest authority appointed department heads, whose capital budgets include revenues from internal transfers. When selling division for power, economic theory recommends transfer prices based on the differential costs. Here, the seller generates enough revenue to offset operating costs, but not enough to recover capital costs. Consequently, the department heads will give up some investments that otherwise would increase the value of the company shareholders. Market transfer pricing overcomes the conflict by providing savings on inter-company sales in the division. However, the transfer market prices can lead to a lack of corporate profits. However, we believe the benefit of transfer pricing on the assumption that long-term creation of value takes precedence over short-term profits. "Hide
by Laurel Adams, Ralph Drtina Source: Business Horizons 7 pages. Publication Date: September 15, 2008. Prod. #: BH293-PDF-ENG

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