The Primary Limitation of a Full-Cost Based Transfer Pricing System

question 67

Multiple Choice

The primary limitation of a full-cost based transfer pricing system is that:

• A) The supplying and purchasing divisions are more likely to make decisions that are inconsistent with the goals of the organization as a whole.
• B) There will be little incentive on the part of the supplying manager to supply goods and services efficiently.
• C) Managers may spend too much time negotiating the transfer price.
• D) Managers may find that the transfer price is difficult to compute.
• E) Such transfer prices are not currently allowed for federal income tax purposes.

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Definitions:

Unit Product Cost

The total cost (both fixed and variable) associated with producing a single unit of a product.

Additional Contribution Margin

The increase in contribution margin generated by an additional unit of sales, reflecting the revenue minus variable costs for that unit.

Purchasing Decision

The process of evaluating and choosing from among alternatives to buy products or services that best meet the criteria of the purchaser.

Variable Production Cost

Costs that vary with the level of production output, including direct materials, direct labor, and variable manufacturing overhead.