Question

All of the following reasons are legitimate potential disadvantages of using a market-based transfer price except Select one: A. market price of intermediate goods and services can be difficult to determine. B. use of market price leads division managers to act in a manner that is inconsistent with corporate goals. C. substantially high selling expenses can lead companies to set an artificially high transfer price. D. market price can be misleading if it is controlled by one or two highly influential companies.

Answer 1

Answer: The correct option is C

Explanation:

Market based transfer price is defined as that notional value at which goods and services are transferred between divisions in a decentralized organization. Transfer price are normally set for intermediate products which are goods and services that are supplied by the selling division to the buying division. Problems on transfer pricing arise between divisionalized organizations where profits or investment are created, when the division do business with one another. One of the condition that trigger market pricing is the existence of multiple facilities in more than one taxing jurisdiction. High selling expenses cannot lead companies to set an artificial high transfer price because it is difficult to shift resources from low priority to high priority when market based transfer pricing is fixed.

Answer 2

Answer: B. use of market price leads division managers to act in a manner that is inconsistent with corporate goals.

Explanation: Market-based transfer pricing is perhaps the easiest form of transfer pricing when it comes to determining the price that will be paid between divisions of the same company. It uses the normal market rate that would be paid if the goods were bought on the open market.

Transfer pricing helps in reducing duty costs by shipping goods into countries with high tariff rates at minimal transfer prices so that the duty base of such transactions is fairly low.