Which of the following statements about the general transfer-pricing rule is/are true?
i. When the producing division has excess capacity, the transfer decision should be based on the outlay cost.
ii. When the producing division has no excess capacity, the opportunity cost is the foregone contribution from the lost sale.
iii. If the producing division has excess capacity or the external market is imperfectly competitive, the general rule and the external market price will not yield the same transfer price.
A) i
B) ii
C) ii and iii
D) All of the given answers

Question

Quizplus · Accepted Answer

All statements are true regarding the general transfer-pricing rule. Statement i is correct because when there is excess capacity, the cost to consider is the outlay cost, which is the additional cost incurred if the transfer is made. Statement ii is accurate as the opportunity cost in the absence of excess capacity is the profit that would have been made from selling the product externally. Statement iii is true because the general rule for setting transfer prices (which considers both outlay costs and opportunity costs) may not align with the external market price, especially in cases of excess capacity or imperfect competition.

Which of the Following Statements About the General Transfer-Pricing Rule