Capacity Rights and Full Cost Transfer Pricing

61 Pages Posted: 6 May 2021

See all articles by Sunil Dutta

Sunil Dutta

University of California, Berkeley - Haas School of Business

Stefan Reichelstein

Stanford University

Multiple version iconThere are 2 versions of this paper

Date Written: August 2019

Abstract

This paper examines the theoretical properties of full cost transfer prices in multidivisional firms. In our model, divisional managers are responsible for the initial acquisition of productive capacity and the utilization of that capacity in subsequent periods, once operational uncertainty has been resolved. We examine alternative variants of full cost transfer pricing with the property that the discounted sum of transfer payments is equal to the initial capacity acquisition cost and the present value of all subsequent variable costs of output supplied to a division. Our analysis identifies environments where particular variants of full cost transfer pricing induce efficiency in both the initial investments and the subsequent output levels. Our findings highlight the need for a proper integration of intracompany pricing rules and divisional control rights over capacity assets.

Suggested Citation

Dutta, Sunil and Reichelstein, Stefan, Capacity Rights and Full Cost Transfer Pricing (August 2019). TRR 266 Accounting for Transparency Working Paper Series No. 7, Available at SSRN: https://ssrn.com/abstract=3840146

Sunil Dutta

University of California, Berkeley - Haas School of Business ( email )

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Stefan Reichelstein (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

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