Division managers at Colonial Company are paid a bonus based on the responsibility margin of their respective responsibility centers.Division A sells goods to Division B and to outside customers.The manager of Division B would most likely prefer that transfer prices be based on:
A)The market value of the goods purchased from Division A.
B)The market value of the goods purchased from Division A plus a fixed percentage.
C)The cost of the goods purchased from Division A.
D)The cost of the goods purchased from Division A plus a fixed percentage.

Question

Quizplus · Accepted Answer

The manager of Division B would most likely prefer that transfer prices be based on the cost of the goods purchased from Division A. This preference is because basing transfer prices on cost minimizes the transfer price, potentially increasing Division B's responsibility margin, which is beneficial for the manager's bonus.

Division Managers at Colonial Company Are Paid a Bonus Based