In a time of distress prices, which of the following is true?
A) The vendor division should set the transfer price at the distress price on a long-term basis for stability within the overall company.
B) The vendor division should cease production.
C) The purchasing division should pay normal prices.
D) In the short-term, the transfer price should be the distress price as long as this exceeds the incremental costs.
E) The distress price should be ignored as it is a function of the market, not of the internal capacities of the overall company.

Question

Quizplus · Accepted Answer

In times of distress prices, the transfer price should be set at the distress price in the short-term as long as it exceeds the incremental cost. This is because the vendor division may not be able to cover their fixed costs at normal prices and hence may need to sell at a lower price to at least cover their variable costs. The purchasing division should also benefit from the lower price as they can make a profit on reselling the product at normal prices in the market. However, setting the transfer price at the distress price on a long-term basis may not be sustainable for the overall company as it may lead to lower profits for the vendor division and affect their long-term viability. Hence, it is better to re-evaluate the transfer price once the distress period is over. Ceasing production or ignoring the distress price altogether may not be the best options as it can lead to losses for the vendor division and affect the company's competitiveness in the market.

In a Time of Distress Prices, Which of the Following