(Answered) Transfer-pricing issues when transfer prices are based on

Management Studies

Transfer-Pricing Issues When transfer prices are based on actual cost, a supplying division often has no incentive to reduce cost. For example, a design change that would reduce the supplying divi- sion's manufacturing cost would benefit only downstream divisions if the transfer price is based on a markup over cost.

Required: What can or should be done to provide the supplying division an incentive to reduce manufacturing costs when the transfer price is cost-based?

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