Explain transfer pricing. What are the three alternative approaches to determine a transfer price?

What will be an ideal response?

Transfer pricing refers to the pricing of goods and services bought and sold by operating units or divisions of a single company. In other words, transfer pricing concerns intracorporate exchanges–transactions between buyers and sellers that have the same corporate parent. As companies expand and create decentralized operations, profit centers become an increasingly important component in the overall corporate financial picture. Appropriate intracorporate transfer pricing systems and policies are required to ensure profitability at each level. When a company extends its operations across national boundaries, transfer pricing takes on new dimensions and complications. In determining transfer prices to subsidiaries, global companies must address a number of issues, including taxes, duties and tariffs, country profit transfer rules, conflicting objectives of joint venture partners, and government regulations.
There are three major alternative approaches to transfer pricing. The approach used will vary with the nature of the firm, products, markets, and the historical circumstances of each case. The alternatives are (1 ) cost-based transfer pricing, (2 ) market-based transfer pricing, and (3 ) negotiated prices.