It is a method of selling a product from a subsidiary to another within the company. It also involves a price which a division charges from other division in context with the selling of goods and services to that division.
1) Goal Congruence- Transfer price should not be such which only looks for a department goal. But it should also look forward to the company’s goal. It should promote the company’s goal as a whole.
2) Evaluation of Performance- Buying and selling should be such that which doesn’t affect the income of the organization. Buyer should not involve in high purchasing cost and seller should not involve in losing income after selling the product.
3) Autonomy- The transfer price should preserve autonomy. The managers of the buying and selling divisions should have the freedom to operate their divisions as separate entities.
4) The capacity of the selling division to meet the demand of the buying division should be considered. If there is excess capacity, the cost of producing the goods to be transferred is relevant. If there is no excess capacity, opportunity costs should be included in determining the transfer price.