You have recently taken a management post in a large divisionalised business. A substantial proportion of the business of your division is undertaken through inter-divisional transfers.

Required:

(a) What are the objectives of a system of transfer pricing?

(b) Describe the use of, and problems associated with, transfer prices based on

 variable cost; and

 full cost.

(c) Where an external market exists, to what extent is market price an improvement on cost?

Intermediate-level exercises AppendixLO1