The weakness of a cost-plus transfer price is that cost recovery is guaranteed to the selling division,which may lead to failure to detect inefficient operating conditions and excessive cost incurrence.

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A cost-plus transfer price ensures that the selling division recovers its costs, but it may not incentivize the division to improve its efficiency or reduce costs. This could lead to inefficiencies and excessive cost incurrence being unnoticed because the transfer price guarantees cost recovery.

The Weakness of a Cost-Plus Transfer Price Is That Cost