Management of Making Intermediate Goods - Essay Example

In a complex manufacturing industry like oil and gasoline, the transfer price becomes the major factor for intermediate goods like crude oil which could be bought from its drilling division or from an external market (Besanko et al., 2010). The major disadvantage of deciding to make intermediate products is that firms often require more than one intermediate good for their final product and therefore making them could turn out to be very complex with huge investments. Hence, it is not feasible for manufacturing firms to make intermediate goods when they are easily available in the open market.

The main advantage of making intermediate goods is that company may not be dependent on the external market and could gain relative cost advantage within the industry if it has the resources available for intermediate goods as well as for the final product. For drilling companies of crude oil, their refinery divisions use their crude from their drilling division to make final products like gasoline. The transfer price in such cases is hugely cost-effective. In general, the transfer price becomes a vital factor that dictates buying or making decisions for intermediate goods.