What are the objectives of a system of transfer pricing?

You have recently taken a management post in a large division aliased 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?

Solution:

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