Transfer Prices Should Not Be Based on Actual Costs Because

question 92

Multiple Choice

Transfer prices should not be based on actual costs because:

• A) inefficient producing divisions have higher costs of production, which would be passed on by buying divisions.
• B) producing divisions have no incentives to control costs.
• C) inefficient units with high costs of production have no opportunity for profit.
• D) inefficient producing divisions have higher costs of production, which would be passed on by buying divisions AND producing divisions have no incentives to control costs.

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Definitions:

Consumer Goods

Products bought by the final consumer for personal use.

Law of Increasing Opportunity Costs

An economic principle that states as production of a good or service increases, the opportunity cost of producing another unit also increases.

Particular Good

A specific item or product that satisfies consumers' needs or wants, distinguishable from general categories or types of goods.

Market Price

The current price at which an asset or service can be bought or sold in a market.