Transfer prices should not be based on actual costs because:
A) inefficient producing divisions have higher costs of production, which would be passed on by buying divisions.
B) producing divisions have no incentives to control costs.
C) inefficient units with high costs of production have no opportunity for profit.
D) inefficient producing divisions have higher costs of production, which would be passed on by buying divisions AND producing divisions have no incentives to control costs.

Question

Quizplus · Accepted Answer

Option D correctly combines the two reasons why transfer prices should not be based on actual costs: (1) inefficient producing divisions have higher costs of production, which would be passed on by buying divisions, and (2) producing divisions have no incentives to control costs. Option A is partially correct, but it is not the sole reason why actual costs should not be used. Option B is incorrect because producing divisions do have incentives to control costs, such as bonuses or promotions for reducing costs. Option C is incorrect because even inefficient units with high costs of production can still earn a profit through transfer pricing mechanisms, but it would not be an accurate reflection of their actual costs.

Transfer Prices Should Not Be Based on Actual Costs Because