ECONOMICS

Detailed explanation-1: -The answer is e. evaluate performance of individual subunits and their managers. The transfer-pricing system allows the selling business unit and the purchasing business unit to record the appropriate revenue and cost associated with the transaction and thus reflect it in the income statement.

Detailed explanation-2: -The basic purpose of transfer pricing is to induce optimal decision making in a decentralized organization (i.e., in most cases, to maximize the profit of the organization as a whole).

Detailed explanation-3: -The negotiated price approach allows the managers of decentralized units to agree on the transfer price. The objective of transfer pricing is to encourage each division manager to transfer goods and services between divisions if overall company income can be increased by doing so.

Detailed explanation-4: -1. Cost Centre: A cost or expense centre is a segment of an organisation in which the managers are held responsible for the cost incurred in that segment but not for revenues.

Detailed explanation-5: -The product or service transferred between subunits of an organization is called an intermediate product. The transfer price creates revenues for the selling subunit and costs for the buying subunit affecting each subunit’s operating income.