Washington Farms Inc. is in the process of decentralizing. However, they have discovered that one of the divisions that they want to set up as a profit center does not have an external market for its product. Mr. Raines, the manager of the division, has come to Ms. Almeida, the controller, asking what he should use as a transfer price because of the lack of a market price. The division would be transferring its product internally to another division that uses the part as input to its product.
Required: Explain, as Ms. Almeida, the options available other than market price.

Question

Quizplus · Accepted Answer

The Answer of Washington Farms Inc. is in the process of decentralizing. However, they have discovered that one of the divisions that they want to set up as a profit center does not have an external market for its product. Mr. Raines, the manager of the division, has come to Ms. Almeida, the controller, asking what he should use as a transfer price because of the lack of a market price. The division would be transferring its product internally to another division that uses the part as input to its product.
Required: Explain, as Ms. Almeida, the options available other than market price.