Explain the concept of transfer pricing. Why do companies resort to such a practice?

Transfer price, also known as transfer cost, is the price at which related parties transact with each other, such as during the trade of supplies or labor between departments. Transfer prices may be used in transactions between a company and its subsidiaries, or between divisions of the same company in different countries.

Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities. It is common for multi-entity corporations to be consolidated on a financial reporting basis; however, they may report each entity separately for tax purposes.

A transfer price arises for accounting purposes when related parties, such as divisions within a company or a company and ________ __________ _______ __________ _________.
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