ECONOMICS

Detailed explanation-1: -D. Market price. Answer (D) is correct. REQUIRED: The optimal method for establishing a transferprice, DISCUSSION: Transfer prices should promote congruenceof subunit goals with those of the organization, subunitautonomy, and managerial effort.

Detailed explanation-2: -The optimal transfer price is based on a number of factors, including the cost of the item and which entity receives the benefit of profits. If management believes it benefits the corporation as a whole for company A to realize 100% of the profits, the transfer price is set using the market price of the product.

Detailed explanation-3: -Variable Cost This method is theoretically the best choice when the selling division has excess capacity. The manager will establish a transfer price equal to variable costs.

Detailed explanation-4: -A transfer price generally has two parts: the outlay costs and the opportunity cost. The cost of making or obtaining the product is known as the outlay cost. The opportunity cost is the profit the division could make by selling the product in the marketplace, as opposed to selling the product internally.

Detailed explanation-5: -The most common method to establish transfer prices is the cost-based transfer pricing approach as it is simple to use, easy to understand, and has available cost data.