Final answer:
Transfer prices are used to assess the profitability of profit centers within an organization, determining financial performance based on the difference between revenues and costs. Additionally, firms make financial decisions considering cost/benefit analyses and the impact on future profits when choosing sources of financial capital.
Step-by-step explanation:
Transfer prices in an organization are crucial for assessing the profitability of different business units. When analyzing financial performance, it's important to consider both costs and revenues to determine the success of a unit. Profit centers are the specific type of business units where transfer pricing is especially relevant. These centers earn revenues and incur costs and the goal is to assess how much profit they contribute to the organization. For example, if a center earns revenues of $20,000 and has variable costs of $15,000, the center's contribution to profit would be the difference, in this case, $5,000.
Furthermore, decision making in terms of financial investments includes considerations such as cost/benefit analysis and weighing marginal costs against marginal benefits. When a firm raises financial capital, whether through early-stage investors, reinvesting profits, borrowing through banks or bonds, or selling stock, they must consider how these decisions will affect their profitability in the long term.