Final answer:
Market-based transfer pricing is a pricing strategy used in intra-firm sales for commercial transactions within the same corporation, where products are priced based on market cost instead of the company's cost. It ensures fairness, accuracy, and alignment with market forces of supply and demand.
Step-by-step explanation:
Market-based transfer pricing is a pricing strategy used in intra-firm sales for commercial transactions within the same corporation. It involves pricing products at market cost instead of the cost incurred by the company. This strategy is commonly used to ensure fairness and accuracy in pricing within a company and to align with market forces of supply and demand.
For example, let's say Company A has two units, Unit X and Unit Y. Unit X produces a specific product that is also sold by Unit Y. In a market-based transfer pricing approach, Unit X will sell the product to Unit Y at the market price determined by external factors, such as competition and demand, rather than the internal cost of production.
This pricing strategy is often employed to promote efficiency and transparency in the transfer of goods or services between different units of a company.