As Noted in the Text, the Use of Market Price

question 36

Essay

As noted in the text, the use of market price can be used to set the transfer price associated with interdivisional transfers of goods and services.
Required:
1. What are the primary advantages of using market price as the transfer price?
2. What are the primary disadvantages of using market price as the transfer price?

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Definitions:

Operating Cash Flow

The cash generated from a company's normal business operations before financing and investment activities.

Net Capital Spending

The total expenditure on fixed assets less any sales of fixed assets during a given period, often used in assessing a company's investment in physical assets.

Earnings Before Interest And Taxes

A financial performance measure that calculates a company's profitability by excluding interest and taxes expenses.

Marginal Tax Rate

The rate of additional federal income tax to be paid on an additional dollar of income, which varies depending on income levels and filing status.