Given a competitive outside market for identical intermediate goods, what is generally considered the best transfer price, assuming all relevant information is readily available?
A) Average cost of production.
B) Average cost of production, plus average production department allocated profit.
C) Market price of the intermediate goods.
D) Market price of the intermediate goods, less average production department allocated profit.
E) Full cost, plus a mark-up for profit.

Question

Quizplus · Accepted Answer

The best transfer price would be the market price of the intermediate goods, as it ensures that the selling division receives a fair price for their product and incentivizes them to continue producing at a competitive level. Since there is a competitive outside market for the goods, the market price should reflect the true value of the product. Using average cost or full cost may not accurately reflect the true value or demand for the product, and adding a mark-up for profit may lead to a transfer price that is not competitive in the outside market.

Given a Competitive Outside Market for Identical Intermediate Goods, What