Morrison's Plastics Division, a profit center, sells its products to external customers as well as to other internal profit centers. Which of the following circumstances would justify the Plastics Division selling a product internally to another profit center at a price that is below the market-based transfer price?
A) The buying unit has excess capacity.
B) The selling unit is operating at full capacity.
C) Routine sales commissions and collection costs would be avoided.
D) The profit centers' managers are evaluated on the basis of unit operating income.

Question

Quizplus · Accepted Answer

Routine sales commissions and collection costs that would be incurred on external sales but can be avoided on internal transfers justify selling a product internally at a price below the market-based transfer price. This is because the overall company saves on these costs, making the lower internal transfer price economically rational.

Morrison's Plastics Division, a Profit Center, Sells Its Products to External