When Internal Transfer Prices and Costs Differ

How Stock Funding of Depot-Level Reparables Affects Decision Making in the Air Force

by Frank Camm, Hyman L. Shulman

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In the past, Air Force users did not pay for components repaired by Air Force depots. Now they do. In November 1989, Defense Management Report Decision (DMRD) 904 mandated that the Air Force apply stock funding to the management of depot-level reparables (DLRs). To use such a fund, the Air Force must establish a system of internal transfer prices for depot services. This system can artificially inflate the cost of depot repairs, creating the erroneous impression that base-level repairs are less expensive. This report examines the effect the internal transfer pricing system has had on the decisions officials in the Air Force's major commands have made with regard to screening F-16 aviation components. An appendix provides summary information on three costing and pricing methods that can be used to support more effective internal transfer pricing.

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