Despite the long history of transfer pricing in many organizations, the attainment of an optimal transfer price often remains elusive. Toward this end, I have modified a concept from finance and developed it into a system applicable to the field of management accounting to make it easier for two divisions to agree on an optimal transfer price. I call it the Renegotiate-Any-Time (RAT) system. Under the RAT system, the buying division is allowed to purchase an option from the selling division, which gives the buying division the right to buy the intermediate goods at a reduced unit price. Both the option price and the reduced unit transfer price are negotiable between the two divisions. The option system provides an incentive mechanism that motivates both divisions to set a transfer price that maximizes profit for the firm as a whole.
A breakthrough in transfer pricing : the renegotiate-any-time systemManagement Accounting Quarterly
Document TypeJournal article
PublisherInstitute of Management Accountants
Publisher StatementCopyright © 2002 Institute of Management Accountants. Access to external full text or publisher's version may require subscription.
Full-text VersionPublisher’s Version
Citation InformationCheng, J. (2002). A breakthrough in transfer pricing: The renegotiate-any-time system. Management Accounting Quarterly, 2002(Winter), 1-8. Retrieved from https://www.imanet.org/-/media/bda43abff0584fbb97cff5c74ff340e3.ashx