A transfer pricing policy based on market price
A) Maximises total organisational profit.
B) Is best because the market price is always objective and easily obtainable.
C) May result in suboptimal decision making for the company as a whole.
D) Is the only alternative accepted by the Australian Taxation Office.

Question

Quizplus · Accepted Answer

While a transfer pricing policy based on market price may seem reasonable and objective, it can lead to suboptimal decision making for the company as a whole. This is because market prices are influenced by various factors such as supply and demand, competition, and other market conditions, which may not necessarily reflect the costs and value of the goods or services being transferred within the company. Therefore, relying solely on market prices for transfer pricing can result in underestimating or overestimating the actual profitability of different business units, which can lead to inefficient resource allocation and overall loss of profits.

A Transfer Pricing Policy Based on Market Price