When selling internally, which of the following transfer prices would lead to the best decisions for the organization?

A multinational organization has multiple divisions that sell their products internally to other divisions.

When selling internally, which of the following transfer prices would lead to the best decisions for the organization?
A . Full cost
B . Full cost plus a markup.
C . Market price of the product.
D . Variable cost plus a markup.

View Answer

Answer: C

Explanation:

Using the market price of the product for internal transfer pricing leads to the best decisions for the organization because it reflects the true economic value of the goods or services being transferred. This method promotes efficiency and fairness within the divisions.

Economic Value: Market price reflects the true economic value, ensuring that the internal transactions are conducted at fair and competitive prices.

Performance Measurement: It provides a consistent basis for evaluating the performance of different divisions, as they are measured against external market conditions.

Resource Allocation: Helps in optimal allocation of resources by ensuring that internal transactions are economically justified and comparable to external transactions.

Reference: "Management Accounting: Principles and Practices," which discusses the advantages of using market-based transfer pricing.