When operating at capacity,a market-based transfer price should be used.

Question

Quizplus · Accepted Answer

When operating at capacity, a market-based transfer price should be used. This is because when a company is operating at full capacity, the opportunity cost of using internal resources becomes higher than the cost of buying from an external market. Hence, a market-based transfer price ensures that the buying department pays a fair price for the goods or services it purchases from the selling department, which in turn recognizes the external market value of the goods or services produced.

When Operating at Capacity,a Market-Based Transfer Price Should Be Used