Holmstrom and Tirole note "The economist's first instinct is to set transfer price equal to marginal cost." However,a distinct plurality of companies uses the full-cost method.That is because:
A)most companies do not employ economists.
B)it is simple and has a low cost of implementation.
C)it is identical to using a marginal cost approach to transfer prices.
D)the results are much better in the field with full-cost method.

Question

Quizplus · Accepted Answer

The full-cost method is preferred by a plurality of companies because it is simple and has a low cost of implementation. This method involves adding up all the costs of producing a product or providing a service, including both variable and fixed costs, and adding a markup to that total to determine the transfer price. It is not necessarily identical to using a marginal cost approach, which only includes the variable costs of production. While economists may prefer a marginal cost approach, companies may find the full-cost method more practical and cost-effective to implement.

Holmstrom and Tirole Note "The Economist's First Instinct Is to Set