Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 24

Below is a suggestion from a leading economics text on how to set optimal transfer prices. In this context, both the manufacturing and distribution divisions are profit centers. Do you think it would work Explain.
The manufacturing division could be supplied data on the net marginal revenue curve for the distribution division and told to use this as its relevant marginal revenue curve in determining the quantity it should supply. By choosing the output where marginal revenue equals marginal cost, firm profits are maximized. The transfer price should be the marginal cost at this output level.