In a time of distress prices, which of the following is TRUE?
A)The vendor division should set the transfer price at the distress price on a long-term basis for stability within the overall company.
B)The vendor division should cease production.
C)The purchasing division should pay normal prices.
D)In the short-term, the transfer price should be the distress price as long as this exceeds the incremental costs.
E)The distress price should be ignored as it is a function of the market, not of the internal capacities of the overall company.

Question

Quizplus · Accepted Answer

In a time of distress prices, the vendor division should set the transfer price at the distress price in the short-term, as long as this exceeds the incremental costs. This is to ensure that the division remains profitable and can continue operating. However, in the long-term, the vendor division should work towards stabilizing the transfer price at a normal level for the overall company's stability. Ignoring the distress price or ceasing production may not be feasible options in the short-term. The purchasing division may have to pay a higher transfer price than normal during the distress period, but this should be closely monitored and adjusted in the long-term.

In a Time of Distress Prices, Which of the Following