Refer to E10-11. Suppose Fred’s plant manufactures a component used by another division of the organization. He has approached you for help in understanding why everyone seems to be making such a big deal about the transfer price that he plans to charge for the component. Fred’s comment was, “Transfer prices do not impact the amount of profit earned by the company as a whole, so they don’t affect me. I don’t care what transfer price is used.”

Required:

1. Explain whether Fred is correct or incorrect.

2. Explain how the transfer price could affect Fred or someone he works with.