When a sale occurs between divisions of the same company, which transfer pricing approach may lead to the buying division overpricing its product?
A) Cost based transfer pricing
B) Market-based transfer pricing
C) Negotiated transfer pricing
D) Cost-plus transfer pricing

Question

Quizplus · Accepted Answer

Market-based transfer pricing may lead to the buying division overpricing its product if the internal transfer price is set equal to the external market price, without considering the absence of certain costs (e.g., marketing, sales commissions) that would be present if the product were actually purchased externally. This can result in the buying division incurring higher costs than necessary, potentially leading to overpricing of its final product to cover these costs.

When a Sale Occurs Between Divisions of the Same Company