When using a negotiated transfer price,a determination must be made if comparable substitutes are available externally.

Question

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When using a negotiated transfer price, it is important to determine if comparable substitutes are available externally. This is because if an external substitute is available at a lower price, then there is no reason for one internal department to transfer goods or services to another internal department at a higher price. This can lead to inefficiencies and negative impact on the company's bottom line. Therefore, determining the availability of comparable substitutes externally is a crucial step in setting a negotiated transfer price.

When Using a Negotiated Transfer Price,a Determination Must Be Made