Which of the Following Statements About Cost-Based Transfer Prices Is/are

question 90

Multiple Choice

Which of the following statements about cost-based transfer prices is/are true?
i. A transfer price set at standard variable cost plus a mark-up provides an incentive for the supplying business to make the transfer.
ii. Absorption cost-based transfer prices are good for the company as a whole because all costs are considered.
iii. Transfer prices should be based on standard costs rather than actual costs since the cost of inefficiency should not be passed on.

• A) i and ii
• B) ii and iii
• C) i and iii
• D) All of the given answers

---

Definitions:

Fixed Expenses

Costs that do not change with the level of production or sales over the short term, such as rent, salaries, and insurance.

Break-even Point

The break-even point is the sales level at which total revenues equal total costs, resulting in neither profit nor loss.

Degree of Operating Leverage

A financial ratio that measures the sensitivity of a company's operating income to its sales volume, showing the impact of fixed costs on earnings.

Net Operating Income

A measure of a company's profitability, calculated by subtracting operating expenses from gross profit, not including non-operating income and expenses, interest, and taxes.