A large automobile dealership in Chicago is installing a responsibility accounting system and three profit centers: parts and service, new vehicles, and used vehicles. Top management has told the three department managers to run their shops as if they were in business for themselves. However, there are interdepartmental dealings. For example,

a. the parts and service department prepares new cars for final delivery and repairs used cars prior to resale.

b. the used-car department’s major source of inventory has been cars traded in as partial payment for new cars.

The owner of the dealership has asked you to draft a company policy statement on transfer pricing, together with specific rules to be applied to the examples cited. He has told you that clarity is of paramount importance because he will rely on your statement for settling transfer-pricing disputes.