In situations when the producing division has excess capacity or the external market is imperfectly competitive, the general rule and the external market price will yield the same transfer price.

Question

Quizplus · Accepted Answer

The general rule for setting a transfer price when the producing division has excess capacity is to set the transfer price at the marginal cost, whereas if the external market is imperfectly competitive, the external market price might not reflect the marginal cost, leading to different transfer prices under each scenario.

In Situations When the Producing Division Has Excess Capacity or the External