Question
Asked Dec 22, 2019
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“All transfer-pricing methods give the same division operating income.” Do you agree? Explain.

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Expert Answer

Step 1

Transfer pricing:

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This refers to a process of pricing in which one sub-unit of an organization charges a price to another sub-unit for supplying a product or service to the sub-unit of the same organization.

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Step 2

Answer:...

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The transfer pricing methods do not give the same division operating income. This can be explained as follows: • The operating incomes of the division change with the change in the method used to determine the transfer price. Different transfer prices give different incomes. • The consolidated income of a company as a whole does not change according to the method used in the transfer pricing. The transfer prices create income for a selling division and so the corresponding costs for the buying division which cancels out when the division results are consolidated as a whole not considering the method used.

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