In order to motivate subunit managers to exert effort to maximize their own subunits operating income, interdivisional transfers of a product preferably should be made at prices

TRANSFER PRICING

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

In order to motivate subunit managers to exert effort to maximize their own subunit’s operating income, interdivisional transfers of a product preferably should be made at prices

A	equal to fully allocated costs to the producing subunit
B	equal to the market price of the product
C	equal to variable costs of the producing subunit
D	negotiated by top management

Explanation:

Detailed explanation-1: -The product or service transferred between subunits of an organization is called an intermediate product. The transfer price creates revenues for the selling subunit and costs for the buying subunit affecting each subunit’s operating income.

Detailed explanation-2: -The objective of transfer pricing is to maximize the return to individual divisions. The objective of transfer pricing is to maximize the company as a whole. A negotiated transfer price is the same whether the company has excess capacity or not.

Detailed explanation-3: -Companies use transfer pricing to reduce the overall tax burden of the parent company. Companies charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low-tax countries.

Detailed explanation-4: -The Santa Fe Manufacturing Company has two divisions in Kansas, the Sam-Seller Division and the Beg-Buyer Division.

There is 1 question to complete.

ECONOMICS

COST ACCOUNTING

TRANSFER PRICING