The primary limitation of a full-cost based transfer pricing system is that:
A) The supplying and purchasing divisions are more likely to make decisions that are inconsistent with the goals of the organization as a whole.
B) There will be little incentive on the part of the supplying manager to supply goods and services efficiently.
C) Managers may spend too much time negotiating the transfer price.
D) Managers may find that the transfer price is difficult to compute.
E) Such transfer prices are not currently allowed for federal income tax purposes.

Question

Quizplus · Accepted Answer

Full-cost based transfer pricing can lead to the suboptimal decision-making by the supplying and purchasing divisions as they may focus solely on reducing their own costs rather than maximizing overall profitability for the organization. This can lead to conflicts between different divisions and may not align with the goals of the organization as a whole.

The Primary Limitation of a Full-Cost Based Transfer Pricing System