When a division is operating at capacity,the transfer price should be ________.
A) based on opportunity cost
B) a market-based transfer price
C) a cost-based transfer price
D) the total manufacturing cost

Question

Quizplus · Accepted Answer

When a division is operating at capacity, the transfer price should be a market-based transfer price. This is because at capacity, the division has no additional capacity to produce goods for internal transfers. Therefore, any goods transferred will require the division to forgo potential revenue that could have been earned by selling those goods on the open market. As such, a market-based transfer price reflects the price that the goods could have been sold for on the open market and ensures that each division is treated fairly and receives proper compensation for its products or services.

When a Division Is Operating at Capacity,the Transfer Price Should