An ice cream outlet that is part of a regional chain has begun purchasing its ingredients from an outside supplier instead of purchasing from the chain. The products from the outside supplier are cheaper, although the quality is not as high. The transfer price for the products is based on the market price, even though the actual costs that the chain incurs are much lower than the market price. Explain why the outsourcing decision is considered suboptimal. What type of transfer price policy would help to avoid this problem?

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The Answer of An ice cream outlet that is part of a regional chain has begun purchasing its ingredients from an outside supplier instead of purchasing from the chain. The products from the outside supplier are cheaper, although the quality is not as high. The transfer price for the products is based on the market price, even though the actual costs that the chain incurs are much lower than the market price. Explain why the outsourcing decision is considered suboptimal. What type of transfer price policy would help to avoid this problem?

An Ice Cream Outlet That Is Part of a Regional