If each division of a company with a monopoly niche is allowed to set its transfer price at the profit-maximizing level for the next division as the product flows toward the consumer (assuming no external market for the product),then prices will:
A)be higher and profits lower than with non-divisional organization.
B)be lower and profits higher than with a non-divisional organization.
C)be the same and profits will be the same as with a non-divisional organization.
D)match the competitive benchmark and profits will be zero.

Question

Quizplus · Accepted Answer

When each division is allowed to set its transfer price at the profit-maximizing level, it may charge higher prices to the next division, which will in turn charge even higher prices to the next division, and eventually to the consumer. This will lead to higher prices and lower profits compared to a non-divisional organization where prices are based on external market competition.

If Each Division of a Company with a Monopoly Niche