A Fellow Student of Yours Who Has Just Completed a Course

question 18

Essay

A fellow student of yours who has just completed a course in management accounting recently made the following comment to you regarding the establishment of transfer prices for transnational transfers of goods and services within the same company: "In the process of preparing consolidated financial statements, all profit and loss attributable to internal transfers of goods and services are removed. The amount of profit a company reports is therefore affected only by transactions with external parties. Therefore, the subject of transfer pricing may be important for motivational purposes or some other managerial objective, but the choice of a transfer pricing system has no effect on the bottom line, even when transfers are made between units of a company operating in different countries."
Required:
Critically analyze and respond to the above assertion.

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Definitions:

Marginal Revenue

The additional earnings obtained from the sale of one extra unit of a product or service.

Average Total Cost

The total cost of production divided by the number of units produced, representing the average cost per unit.

Average Variable Cost

The sum of all costs that vary with output levels, when divided by the total output produced.

Demand Curve

A graph showing the relationship between the price of a good and the quantity of that good that consumers are willing to purchase at various prices.