When an outside market exists for an intermediate product that is perfectly competitive, the ideal method of transfer pricing is generally:
A) The one that creates the highest margin to the selling unit
B) The price at which the product sells in the external market
C) One that is higher than what the outside market is quoting
D) Based on management accounting numbers

Question

Quizplus · Accepted Answer

Market based transfers ensures that the selling division will not be penalized by the purchasing division purchasing outside. However, if there is excess capacity in the selling division, the company may want to require internal purchase so long as the selling division meets the market price.

When an Outside Market Exists for an Intermediate Product That