In a decentralized company in which divisions may buy goods from one another,the transfer pricing system should be designed primarily to
A)increase the consolidated value of inventory.
B)allow division managers to buy from outsiders.
C)minimize the degree of autonomy of division managers.
D)aid in the appraisal and motivation of managerial performance.

Question

Quizplus · Accepted Answer

The transfer pricing system should be designed primarily to aid in the appraisal and motivation of managerial performance. It should ensure that division managers make decisions that are in the best interest of the company as a whole, rather than just their division. The transfer price should reflect the market price, so that buying and selling between divisions is done at fair and competitive prices. This helps to motivate the managers to make decisions that benefit the whole company rather than just their own division. A transfer pricing system designed to increase the consolidated value of inventory (A) or minimize the degree of autonomy of division managers (C) would not be effective in achieving this goal. Allowing division managers to buy from outsiders (B) may be beneficial for the company overall, but it is not the primary purpose of the transfer pricing system in a decentralized company where divisions may buy goods from one another.

In a Decentralized Company in Which Divisions May Buy Goods