Assume that the Plastics Division has excess capacity and it has negotiated a transfer price of $5.60 per plastic component with the Entertainment Division.This price will
A)cause the Plastics Division to reduce the number of commercial plastic components it manufactures.
B)motivate both divisions as estimated profits are shared.
C)encourage the Entertainment Division to seek an outside source for plastic components.
D)demotivate the Plastics Division causing mediocre performance.

Question

Quizplus · Accepted Answer

The negotiated transfer price of $5.60 will motivate both divisions to work towards maximizing their profits as they will receive a share of the estimated profits. This will encourage the Plastics Division to continue manufacturing plastic components and the Entertainment Division to continue sourcing them internally, rather than seeking an outside source.

Assume That the Plastics Division Has Excess Capacity and It