The range over which two divisions will negotiate a transfer price is ________.
A) between the supplying division's variable cost and the market price of the product
B) between the supplying division's variable cost and its full cost of the product
C) it could be anywhere above the supplying division's full cost of the product
D) between the supplying division's full cost and 180% above its full cost

Question

Quizplus · Accepted Answer

The range over which two divisions will negotiate a transfer price is typically between the supplying division's variable cost and the market price of the product. This is because the supplying division needs to cover its variable costs, and the receiving division wants to pay as little as possible while still being able to make a profit on the product. Option B is incorrect because the full cost of the product is not relevant to the negotiation – only the variable cost is. Option C is too broad and does not reflect the typical negotiation range. Option D is too specific and does not reflect the wide range of potential negotiation outcomes.

The Range Over Which Two Divisions Will Negotiate a Transfer