If there is a competitive outside market for the transferred product, then the best transfer price...

If there is a competitive outside market for the transferred product, then the best transfer price is the

a.negotiated price.

b.market price.

c.cost-based price.

d.price set by central management.

e.None of these choices are correct.

Expert Solution

Transfer price is set between the two divisions of the same organisation, when one division sells or further process product of another division this pricing model is used.

Here the prices are set based on the competitive price in the market , marginal costing and opportunity Cost, i.e when the division has excess capacity then the additional variable cost incurred become the relevant cost and it should be the minimum tranfer price.

However in cases where the competitive outside market is there for the product of division then transfer price ideally should be the additional cost/ variable cost + opportunity cost for selling in the market.i.e transfer pricing should be market price. This is because if it sells any price less than market the overall benefit to the company will not be achieved.

Thus if there is a competitive outside market for the transferred product, then the best transfer price is the Market Price.

Hence the correct Option is--------B i.e Market price.

ekkarill92 answered 2 years ago

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