A large manufacturing company has several autonomous divisions that sell their products in perfectly competitive external markets as well as internally to the other divisions of the company.Top management expects each of its divisional managers to take actions that will maximize the organization's goal as well as their own goals.Top management also promotes a sustained level of management effort of all of its divisional managers.Under these circumstances,for products exchanged between divisions,the transfer price that will generally lead to optimal decisions for the manufacturing company would be a transfer price equal to the: (CIA adapted)
A)full cost of the product.
B)full cost of the product plus a markup.
C)variable cost of the product plus a markup.
D)market price of the product.

Question

Quizplus · Accepted Answer

The market price of the product is the optimal transfer price in a perfectly competitive market, as it aligns the divisional managers' decisions with the overall organization's goals by reflecting the opportunity cost of selling internally versus externally.

A Large Manufacturing Company Has Several Autonomous Divisions That Sell