The preferred method for establishing transfer prices for transactions between divisions of the same firm is to base the transfer price on some form of competitive market price.

Question

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Basing transfer prices on competitive market prices ensures that the prices are fair and reasonable and not influenced by internal factors such as divisional politics or goals. It also encourages divisions to operate efficiently and make decisions that are in the best interest of the whole firm rather than just their own division. However, in some cases, a market-based transfer price may not be feasible, and alternative methods such as cost-based or negotiated transfer prices may be used.

The Preferred Method for Establishing Transfer Prices for Transactions Between