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

Question

Quizplus · Accepted Answer

When a division is operating at full capacity, the transfer price must be a market-based transfer price because there is no idle capacity to be exploited and the division must look to external markets to sell its excess output. Using opportunity cost or total manufacturing cost may lead to distorted prices that do not reflect the actual market value of the product. Cost-based transfer prices may also not reflect the full value of the product and may not incentivize the selling division to produce at optimal levels.

When a Division Is Operating at Full Capacity, the Transfer