The core idea
Once a firm is big enough to have divisions, each division becomes a mini-firm. The price one division charges another, and the metric against which each is measured, shape behaviour more than any memo. ROI, EVA and well-chosen transfer prices align divisions with the firm; badly chosen ones pit them against each other. — after Horngren & Solomons
The hero diagram
Internal transfers.
Divisions orbit the parent. Each spoke is a transfer price — the number that decides where group profit gets booked.
The rules on the page
The rules of the game.
How to apply
Setting up a new divisional structure.
- Choose the metric first. EVA for capital-heavy divisions. ROI for asset-light.
- Set the transfer price at market if available. Cost-plus only if there is no market.
- Protect the control environment. Segregation of duties is boring and essential.
Key reading · Session 9 · Solomons
Transfer pricing and divisional performance.
Transfer pricing is where tax, incentives and organisational structure collide. Every multinational has had to solve it more than once, usually after an audit.
The metric is the message.