ICAEW BIP · Chapter 5 · Question 6 of 9
Which of the following is a practical limitation of using market price as a transfer price?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) A perfectly competitive external market for the intermediate product may not exist
Explanation
Market-based transfer prices are often ideal when there is a perfect external market, because they are objective and keep divisions autonomous. In practice there may be no external market, or the internal product may differ from what is sold externally. Market price still gives the seller an incentive to control costs, and it is especially appropriate when the seller is at full capacity.
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