If actual costs are used for transfer pricing by a selling division,the division has little incentive to control costs.

Question

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If actual costs are used for transfer pricing, the selling division may not have a significant incentive to control costs since the cost of goods sold will be reimbursed by the buying division. Therefore, there is a risk of cost inefficiencies and inflated transfer prices. This situation can result in a lack of motivation for cost reductions and productivity improvements in the selling division.

If Actual Costs Are Used for Transfer Pricing by a Selling