Two problems arise in the decentralization of a firm with interrelated divisions. First, there is the possibility that the overall objectives of the firm are not optimized when individual divisions try to optimize their own performance. The question of assuring maximum overall profitability for the firm has been studied extensively in the literature on transfer pricing. The objective of this paper is to provide insight in a second problem, less often raised but equally important, namely: Given a transfer pricing mechanism that maximizes overall company profit, should divisional performance be measured on a profit or on a cost basis?