Common Pitfalls of Cost-Plus Transfer Pricing

Leslie Kren, PhD

Transfer prices aim to create an internal marketplace for transfers of products and services between an organization's profit center managers. When a competitive external market exists for the product or service, market-based transfer prices force selling and buying managers to remain efficient. These effects are relevant for all transfer-pricing situations. Some such situations also have tax implications (e.g., multinational manufacturers). This discussion focuses on the pretax effects of transfer pricing, their relevance to the design of profit centers, and the potential pitfalls of transfer prices.