Because the full-cost method of transfer pricing includes fixed cost, it can:
A) Pass strict accounting requirements for determining transfer prices.
B) Pass current income tax requirements in the U.S. for determining transfer prices.
C) Establish consistency across state and national borders.
D) Violate OECD agreements.
E) Cause sub-optimal short-term decision making.

Question

Quizplus · Accepted Answer

The full-cost method of transfer pricing includes fixed costs, which can lead to sub-optimal short-term decision making. This is because the selling division may not be incentivized to produce efficiently if it is not responsible for all variable costs, leading to higher costs and lower profitability overall.

Because the Full-Cost Method of Transfer Pricing Includes Fixed Cost