Optimal transfer pricing is an important condition for ensuring both the optimal performance and evaluation of the divisions involved. If a perfectly competitive market with market prices exists, the market prices can be used, in most cases, as transfer prices; but in many cases market prices do not exist. In the absence of market prices, cost-based systems are widely used. However, it is not easy to estimate appropriate costs. The pattern of transfer among various units of a multinational corporation located in different countries varies with the evolution of the product life cycle. An MNC may shift a production site to a more efficient location with the evolution of the product life cycle. A decision regarding shift in production location should consider the worth of the facilities, both existing and the one under consideration, on the basis of economic life estimate. In turn, optimal transfer pricing should be based on the useful life of such facilities. Extant theories have failed to consider the impact of the useful life on transfer pricing. This process, however, is not unidirectional, since useful life of a facility would depend on transfers, and thereby transfer prices. Hence, the issue of transfer pricing requires a strategic framework where transfer pricing and resource allocation are endogenous variables.;As a first step, the Markov chain model, including three locations (states), is developed, and computer simulation of the model is conducted to obtain optimal transfer prices. Comparison is made between the EAC method and the conventional method in terms of their impact on the wealth of stockholders. The results show that the EAC method is better than the conventional method in which the economic life of production facilities is ignored.;In the same vein, taxes and tariffs must be taken into consideration in order to refine further efficient international transfer pricing policy. The impact of taxes and tariffs on capacity utilization and shifts in production location is studied. Interactions among different taxes, tariffs, product life cycle, and production schedule contribute to increasing or decreasing the total net profits of an MNC as a whole. Therefore, when one considers shifting a production location considering tariffs and/or taxes, one must choose the production scheme where NPV of total net profits of an MNC as a whole is greatest.
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