Which of the following statements about transfer prices is/are true?
i. When the producing division has excess capacity and the external market is imperfectly competitive, the general transfer-pricing rule and the external market price will be the same.
ii. If the transfer price is set at the market price, the supplying division will be indifferent to selling internally or externally.
iii. If the transfer price is set at the market price, the buying division will usually purchase goods from inside its organisation, if product specifications are met.
A) i and ii
B) ii and iii
C) i and iii
D) All of the given answers

Question

Quizplus · Accepted Answer

ii and iii are true. Setting the transfer price at the market price makes the supplying division indifferent to selling internally or externally, and the buying division will usually prefer purchasing internally if product specifications are met, assuming equal conditions. Statement i is incorrect because when there's excess capacity and an imperfectly competitive external market, the general transfer-pricing rule may not align with the external market price due to factors like marginal cost pricing or negotiated prices within the company.

Which of the Following Statements About Transfer Prices Is/are True