Final answer:
Pricing set for transactions within the same enterprise is termed transfer pricing. It is used instead of typical pricing methods to facilitate internal sales between different parts of a company, impacting corporate finance and international taxation.
Step-by-step explanation:
Pricing that is established for transactions between members of the same enterprise is termed transfer pricing. This concept is a critical part of corporate finance and accounting, as it affects how income and expenses are allocated within an organization, especially in multinational corporations with divisions across different countries where tax rates may vary.
Transfer pricing allows for the creation of a price for goods and services sold between controlled or related legal entities within the same enterprise. The cost of production, combined with the desired profit, are foundational elements that determine the final price a firm will set for a product. This is known as cost-plus pricing, which takes into account the total cost of production and adds a markup for profit.
However, when establishing a price between departments or subsidiaries of the same company, transfer pricing is applied instead of standard pricing mechanisms like market pricing, cost-plus pricing, or competitive pricing.
Transfer pricing also plays a role in the Price System at Work, ensuring that the prices are neutral, flexible, and efficient, reflecting the supply and demand without requiring a bureaucratic process for their establishment. Although not immediately clear, such internal pricing strategies are instrumental in how external market prices are understood and why they are considered straightforward from an early age.