P plc is a multinational conglomerate company with manufacturing divisions, trading in numerous countries across various continents. Trade takes place between a number of the divisions in different countries, with partly completed products being transferred between them. Where a transfer takes place between divisions trading in different countries, it is the policy of the board of P plc to determine centrally the appropriate transfer price without reference to the divisional managers concerned. The board of P plc justifies this policy to divisional managers on the grounds that its objective is to maximize the conglomerate’s post-tax profits and that the global position can be monitored effectively only from the head office.

Required:

(a) Explain and critically appraise the possible reasoning behind P plc’s policy of centrally determining transfer prices for goods traded between divisions operating in different countries.
(b) Discuss the ethical implications of P plc’s policy of imposing transfer prices on its overseas divisions in order to maximize post-tax profits.