In comparing the three basic approaches to transfer pricing, which of the following statements would be true?
A) A cost-based approach preserves subunit autonomy while negotiated transfer prices do not.
B) Market-based transfer pricing motivates managers but negotiated prices do not.
C) Cost-based transfer pricing systems are more difficult to implement and often make more time to implement than negotiated transfer pricing.
D) Market-based transfer pricing achieves goal congruence when markets are competitive while cost-based can achieve goal congruence, but not always.

Question

Quizplus · Accepted Answer

Market-based transfer pricing achieves goal congruence when markets are competitive because it reflects the actual market conditions and prices. However, in non-competitive markets, negotiated prices may not reflect market prices, making it difficult to achieve goal congruence. On the other hand, cost-based transfer pricing can achieve goal congruence if the costs are properly allocated and reflect the actual use of resources. Implementing cost-based transfer pricing can be more time-consuming than negotiated pricing, but it preserves subunit autonomy as managers have control over their own costs. Therefore, statement D is the most accurate in describing the differences between the three approaches.

In Comparing the Three Basic Approaches to Transfer Pricing, Which