12.7 Transfer pricing
A transfer price is the price on inventory sold between related entities. The ability of corporate headquarters to dictate the transfer price can critically affect the performance of subsidiaries that exchange goods or services, so transfer pricing is a critical element in the MNE control system. The example of transfer pricing given on page 605 of your textbook will suffice for the moment. We will return to a discussion of the complexities associated with transfer pricing in Part B of this chapter.
To end this discussion on accounting aspects of control systems, consider the effects on performance of exchange rates, transfer prices and other things over which managers of subsidiaries have no control. Does that seem familiar to you? It should! In Chapter 11, Activity 11.2 asked you to consider just that: the effect of those issues over which managers have no control on the performance appraisal of managers of subsidiaries.
Go back to the suggested answers for Chapter 11 for the solution to the task. The moral of this is that the evaluation of a subsidiary should be kept separate from the evaluation of its manager. We return to Hill (2005) to end Part A before we go to a summary and then to Part B of the chapter.
In your text
Hill 2005, Chapter 19, pp. 658-661.
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