Ellie Jackson is upset by the new transfer pricing system recently implemented at Monson Company.As manager of the first of three sequential production departments,she can't see the value of a transfer pricing system for her department."We can't sell what we produce to any outside buyer.And we're never pushed for capacity,so I don't think transfer pricing will do anything but make my life more complicated." You are Ellie's boss.
Required: Explain how transfer pricing can help her evaluate her department's operations and allow you to more effectively evaluate Ellie's management abilities.

Question

Quizplus · Accepted Answer

Feedback: Transfer pricing is an attempt to create an internal marketplace to allow for the financial-performance evaluation of both profit centers and investment centers.In a highly decentralized firm,transfer pricing can be used to promote sub-unit actions that benefit the organization as a whole,that is,that lead to better decision-making.Even though Ellie has no real control over "prices," her department can assist the two successive departments to focus on better asset allocation within the firm.Consideration of the "profit" generated by each department can improve the equity of rewards for managers of all three production departments,and hopefully,provide a motivational tool for the same managers.

Ellie Jackson Is Upset by the New Transfer Pricing System