Asked by Garrett Hallmark on Sep 24, 2024
Verified
When considering setting the transfer price at the market price of a product similar to the intermediate good that is already available on the market
A) It is appropriate to ignore that the market price includes a margin above marginal cost
B) Consider whether the product on the market includes costly features your downstream division does not use
C) It is OK if the product on the market is inexpensive because its quality is lower than you use
D) If it is similar enough,it is justification for you producing it in-house
Transfer Price
The price at which divisions of a company transact with each other, often used for budgeting and tax purposes.
Market Price
The current price at which a good or service can be bought or sold in a given market.
Marginal Cost
The rise in expenses for the production of an additional unit of a product or service.
- Acknowledge the difficulties that arise from employing external market prices as a foundation for transfer prices.
Verified Answer
SD
Salil Dhalla4 days ago
Final Answer :
B
Explanation :
When setting the transfer price at the market price of a similar product, it is important to consider any differences in costly features that may make the market price higher than the actual cost of the intermediate good. This will ensure that the transfer price is fair and reflective of the actual cost of producing the intermediate good. Ignoring the margin above marginal cost (A) or the quality of the product (C) could result in an unfair transfer price. Additionally, the similarity of the product (D) does not necessarily justify producing it in-house.
Learning Objectives
- Acknowledge the difficulties that arise from employing external market prices as a foundation for transfer prices.