Avoiding a Transfer Pricing Problem:

Abstract

The writer contends that the transfer pricing problem in pricing goods or services from one division to another within a corporation, as many people understand the term, is in reality another form of the peak-load problem. The peak-load problem is a shortrun problem on how to make optimal use of durable and specific assets when demand varies widely from period to period. This paper sets out the specific circumstances when the transfer price problem will become the peak-load problem. Under these conditions managers should use a flexible system, charging a high transfer price during periods of full capacity and a low transfer price during periods of idle capacity.