Which statement is true concerning the establishment of transfer prices?
A)If the selling division is operating at capacity,the transfer price should be the sum of fixed and variable costs of production.
B)If the selling division has idle capacity,and the idle facilities cannot be used for other purposes,the transfer price should be at least the variable costs of production.
C)If the selling division is operating below capacity,the transfer price should be discounted.
D)None of the answers is correct.

Question

Quizplus · Accepted Answer

When the selling division has idle capacity, the transfer price should be at least the variable costs of production to ensure that the buying division is not charged more than necessary. If the idle facilities cannot be used for other purposes, the transfer price should reflect this by being kept low. Option A is incorrect because if the selling division is operating at capacity, the transfer price should be at market price or negotiated between the two divisions. Option C may be true if the selling division is able to reduce its costs when operating below capacity, but it is not always the case. Option D is incorrect because option B is a valid statement.

Which Statement Is True Concerning the Establishment of Transfer Prices