The transfer pricing issue is typically portrayed as a problem of finding the price or pricing schedule that comes closest to inducing an efficient level of trade between two divisions of a firm. The solution is easy if there is a competitive market that can provide a relevant price reference or can be used as a perfect substitute for internal trade. The problem is challenging only if the good to be traded is unique.

Critically evaluate the transfer pricing issue in divisionalized companies by showing

1. Why transfer prising is important?

2. Different methods used to set an appropriate transfer pricing such as market price, marginal cost, full cost, cost plus mark up and negotiated transfer pricing. Critically discuss these methods.

3. Since different transfer pricing methods may not serve all purposes, scholars suggest Dual rate transfer pricing and marginal costs plus a fixed lump-sum fee as a solution for the transfer pricing puzzle. Discuss these two methods.v