Briefly Describe the Conditions That Should Be Met for Market-Based

question 2

Essay

Briefly describe the conditions that should be met for market-based transfer pricing to lead to optimal decision making among subunits of a large organization.

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Definitions:

Differential Costs

Differential costs refer to the difference in total cost that will result from selecting one alternative over another in decision-making processes.

Opportunity Costs

The value of the best alternative forgone when a decision is made to pursue a particular course of action.

Mixed Costs

Mixed costs are expenses that contain both variable and fixed cost elements, changing in total with the level of activity but not directly in proportion to changes in activity level.

Sunk Costs

Costs that have already been incurred and cannot be recovered, and thus should not affect future investment or business decisions.