Transfer pricing and decentralized dynamic lot-sizing in multistage, multiproduct production processes

Based on a Wagner–Whitin type theorem and the Kakutani fixed point theorem, it is shown that such a transfer pricing system exists and can be interpreted as a generalization of the reciprocal method or step-down allocation method in cost location accounting.

Abstract

This paper presents the use of a transfer pricing system to coordinate business units in a Wagner–Whitin type model for a decentralized lot-sizing problem in a dynamic multistage, multiproduct environment. The paper includes two major proofs: (1) a transfer pricing system enabling optimal decentralized lot-sizing is characterized. The transfer pricing system can be interpreted as a generalization of the reciprocal method or step-down allocation method in cost location accounting; and (2) based on a Wagner–Whitin type theorem and the Kakutani fixed point theorem, it is shown that such a transfer pricing system exists.