Profit Centers and Transfer Prices. A large automobile dealership is installing a responsibility accounting system with three profit centers: Parts and Service, New Vehicles, and Used Vehicles. The department managers were told to run their shops as if they were in business for themselves. However, interdepartmental dealings frequently occur. For example:

(a) The Parts and Service Department prepares new cars for final delivery and repairs used cars prior to resale.

(b) The Used Vehicle Department's major source of inventory is cars traded in as partial payment for new cars.

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The owner of the dealership has asked you to outline criteria for a company policy statement on transfer pricing, together with specific rules to be applied to the

common examples cited. He has told you that clarity is of paramount importance because your criteria will be relied on for settling transfer-pricing disputes.