ICAEW BIP · Chapter 5 · Question 1 of 9
Which of the following is a main objective of a transfer pricing system in a divisionalised company?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) To encourage divisional managers to make decisions that are in the best interests of the group as a whole
Explanation
A good transfer pricing system should promote goal congruence, keep divisional autonomy intact and allow divisional performance to be assessed fairly. Maximising one division's profit could cause decisions that harm the group, and transfer prices are not meant to equalise divisional returns.
More Transfer pricing MCQs
- Q3Division A makes a component with a variable cost of £26 per unit and sells all its output externally for £50 per unit. It is working at…
- Q4Division B buys a component from Division A, which has spare capacity. Division B can buy an identical component from an outside supplier…
- Q5If the buying and selling divisions are in the same tax jurisdiction, how does an increase in the transfer price for a component traded…
- Q6Which of the following is a practical limitation of using market price as a transfer price?
- Q7A group sets transfer prices at full cost plus 20%. The full cost of a component is £34 per unit. What is the transfer price?