Economics · Transfer Pricing Strategies
Two divisions within an organisation have autonomy to decide whether to trade with each other or not, and to negotiate transfer prices. The selling division sells its output externally at the external market price, and there is sufficient external demand to ensure that the selling division could sell all that it can produce to external customers. A transfer price has been agreed between the two divisions that is below the external market price. Which of the following is the MOST LIKELY reason for making internal transfers at less than the external selling price of the selling division?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The transfer price has been set to allow the buying division to compete through lower prices
- 2Some additional costs incurred on external sales are not incurred on internal transfers.✓
- 3The management of the selling division is seeking to restrict the quantity produced
- 4Head office has imposed the transfer price
Correct answer
Some additional costs incurred on external sales are not incurred on internal transfers.
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