Division S transfers a component to Division R at full cost plus 20%. Which problem is most likely to arise?

Correct answer: C) Division R treats Division S's fixed costs and mark-up as variable costs, and may reject orders that would be profitable for the company

Explanation

To the receiving division the whole transfer price is a variable cost, even though part of it covers fixed costs and profit of the supplier. Division R may therefore turn down sales whose price exceeds the company's true marginal cost but not the inflated transfer price, which is not goal congruent.