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3310solmod28 - Module 28 Answers 14-1 A transfer price is...

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Module 28 Answers 14-1. A transfer price is used to record the revenue or the cost from a sale between units (e.g., divisions) of a firm. It allows the completion of separate financial statements within the firm. 14-4. The key limitation is that market prices are often not readily available. The limitations of market-based transfer prices exist when the market price does not reflect the opportunity cost of the goods and services, for example when idle capacity is present. Also, temporary short-run fluctuations in market prices could lead to suboptimal long-run decisions. The limitation of cost-based transfer pricing is that it requires the computation of cost. The resulting transfer price might distort decision-making and lead to in disputes between divisions. 14-6. Reasons not to use market prices include situations where: (1) market prices are not readily available, (2) market prices lead to suboptimal behavior (for example, when the supplier division has idle capacity), or (3) the company is not otherwise indifferent between internal and external buying.
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