Firm X acquires another ﬁrm, Firm Y, that supplies its raw materials. Raw materials are now transferred to the production division of Firm X. What is the optimum price that the production division at Firm X will pay for the raw materials?
A) The average cost of producing the raw materials.
B) The marginal cost of producing the raw materials.
C) The average cost of acquiring Firm Y.
D) The marginal cost of acquiring Firm Y.

Question

Quizplus · Accepted Answer

The optimum price for the production division to pay for the raw materials is the marginal cost of producing those raw materials. This ensures that the internal transfer price reflects the additional cost of producing one more unit of the raw material, which is the most efficient pricing strategy for internal transfers within a vertically integrated firm.

Firm X Acquires Another ﬁRm, Firm Y, That Supplies Its