Final answer:
The price charged by one unit in an organization for a good or service supplied to another unit within the same organization is known as transfer pricing. Transfer prices affect the profitability of divisions within a corporation and need to reflect an arm's length transaction to comply with tax regulations.
Step-by-step explanation:
The term for the price charged by one unit in an organization for a good or service that it supplies to another unit within the same organization is called transfer pricing. This is a common practice within organizations to ensure that each division is accurately reflecting its profitability. Transfer prices are set for accounting purposes and to measure the performance of different units within a corporation.
Considering the basic concept of price, this is what a buyer pays for a unit of a specific good or service. The quantity demanded is the total number of units that consumers would purchase at that price. As the law of demand indicates, there's an inverse relationship between price and quantity demanded: when price rises, demand usually falls. This relationship is pivotal in setting transfer prices, as it can affect internal supply and demand as well as the financial performance of the respective units involved.
Transfer pricing must be handled with care, as it impacts not only the internal finances but also tax liabilities since many tax jurisdictions require transfer prices to be set at arm's length. This means that the transfer price should be the same as if the two units were indeed separate companies trading with each other in a competitive market. Mismanagement or intentional manipulation of transfer prices can lead to both financial and legal repercussions.