Transfer Pricing Issues When transfer prices are based on actual cost, a supplying division often has no incentive to reduce cost. For example, a design change that would reduce the supplying...

Transfer Pricing Issues When transfer prices are based on actual cost, a supplying division often has no incentive to reduce cost. For example, a design change that would reduce the supplying division’s manufacturing cost would benefit only downstream divisions if the transfer price is based on a markup over cost.

 Required What can or should be done to provide the supplying division an incentive to reduce manufacturing costs when the transfer price is cost-based?