Transfer prices should not be based on absorption costs as this could result in suboptimal decisions by the:
A) personnel division.
B) competitive market.
C) buying division.
D) selling division.

Question

Quizplus · Accepted Answer

When transfer prices are based on absorption costs, the buying division may be discouraged from purchasing products from the selling division, thereby leading to suboptimal decisions. This is because absorption costs include fixed overhead costs that are not directly affected by the level of production, resulting in higher transfer prices. In a competitive market, companies cannot afford to pass on such high costs to their customers, which means that the selling division may be left with unsold products. On the other hand, the personnel division is not directly involved in the transfer pricing decision-making process. Therefore, the buying division is most likely to be affected by transfer prices based on absorption costs.

Transfer Prices Should Not Be Based on Absorption Costs as This