A problem with a cost-based transfer price is that it does not provide adequate incentive for the selling division to control costs.

Question

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A cost-based transfer price is calculated based on the production cost of the product transferred from one division to another. This means that the selling division does not have any motivation to control its costs as the transfer price does not reward the division for minimizing costs. As a result, this may lead to inefficiencies and higher costs for the overall organization.

A Problem with a Cost-Based Transfer Price Is That It