P plc is a multi-national conglomerate company with manufacturing divisions, trading in numerous countries across various continents. Trade takes place between a number of the divisions in differ- ent countries, with partly-completed products being transferred between them. Where a transfer takes place between divisions trading in different countries, it is the policy of the Board of P plc to determine centrally the appropriate transfer price without reference to the divisional managers con- cerned. The Board of P plc justifies this policy to divisional managers on the grounds that its objec- tive is to maximise the conglomerate's post-tax profits and that the global position can be moni- tored effectively only from the Head Office.

Requirements:

(a) Explain and critically appraise the possible reasoning behind P plc's policy of centrally determining transfer prices for goods traded between divisions operating in different coun- tries. (10 marks)

(b) Discuss the ethical implications of P plc's policy of imposing transfer prices on its over- seas divisions in order to maximise post-tax profits. (10 marks)