The general principle on setting transfer prices that are in the organization's best interests is:
A) outlay cost plus opportunity cost of the resource at the point of transfer.
B) variable costs plus opportunity cost of the resource at the point of transfer.
C) lost contribution margin less the allocated fixed costs for the selling division.
D) gross margin for the buying division plus the gross margin for the selling division.

Question

Quizplus · Accepted Answer

Outlay cost refers to the actual cost incurred in producing the product or service, while the opportunity cost refers to the potential income that could have been earned if the resource was used for its next best alternative. By setting transfer prices based on both the outlay cost and opportunity cost at the point of transfer, the organization can ensure that it is not losing potential income or resources by transferring products or services between divisions. This method aligns with the goal of maximizing the organization's profits and resources.

The General Principle on Setting Transfer Prices That Are in the Organization's