A company can choose not to set a particular transfer price policy and would instead prefer to empower business units to negotiate amongst themselves. When this occurs, this opens up the possibility of many options from the continuum of transfer prices to be an option for pricing. For this to be accurate, certain conditions exist. Which of the following best represents one of the conditions that must be present?
A) The market price available to the buyer has to be lower than the variable manufacturing costs of the seller.
B) The parties' relative cost structures must not align, and their objectives should vary.
C) The selling unit has available capacity and is not currently selling all of its production to external customers.
D) The selling unit is currently selling all of its production to external customers.

Question

Quizplus · Accepted Answer

This question requires familiarity with conditions that must be met in order to be able to negotiate a minimum transfer price. Choice C is the only choice of the four that represents one of the conditions that must be present in order to be able to establish a minimum acceptable transfer price. The other three choices are either entirely incorrect or at least contain parts that are incorrect.

A Company Can Choose Not to Set a Particular Transfer