Define transfer pricing and discuss these observations

Consider the following comments made by a professional management accountant: "Any transfer price will cause the total income of the company to increase, as long as the supplier division's capacity is used toward making materials for products that are ultimately sold to the outside. However, transfer prices should be set between variable cost and the market price in order to give the division managers proper incentives. A transfer price set below variable cost would cause the supplier division to incur a loss, while a transfer price set above market price would cause the purchasing division to incur opportunity costs. Neither situation is an attractive alternative for an investment center manager. Thus, the general rule is to negotiate transfer prices between variable cost and market price when the supplier division has excess capacity." Discuss and explain these observations