Question

What is transfer pricing? Consider the case of a firm that assembles wagons and purchases
wagon wheels and axles from one of its subsidiaries, handles from a second subsidiary and a
metal basket or tub from a third? In its accounting, what price should be charged when each of
these parts is transferred to the assembly plant?

Answer 1

Transfer pricing is a method where a price , viz. transfer price is charged by a parent company or division in a company to another subsidiary or division for goods and services that are provided or sold.

While accounting for the assembly of wagons , a transfer price should be charged to the assembly unit by each of the three subsidiaries. The price that should be charged should be equal to an amount that should cover all expenses, if the parent company or assembly unit would have sold the wagon to an independent buyer, without assembling it from the subsidiaries. The price should be fair to both the assembly unit and the subsidiaries.