Division A produces a product with a variable cost of $5 per unit and an allocated fixed cost of S3 per unit The market price of the product is S15…

Question breakdown

Tests

Identify transfer pricing methods from given data

Difficulty

Easy

Key idea: A transfer price equal to the external market price, including normal selling cost, is a market-price transfer.

How to reach the answer

1. Compute the market price: $15 plus 20% equals $18.
2. Compare it to the $18 transfer price; they match.
3. Check the cost-based alternatives: full cost is $8 and variable cost is $5, and neither matches.
4. Nothing in the question indicates bargaining, so negotiation is ruled out.

Each option

• ACorrect. The $18 transfer price equals $15 plus the 20% selling cost, which is the market price.
• BIncorrect. The question describes no bargaining, and the price exactly matches market, so it is not negotiated.
• CIncorrect. Full absorption cost would be $5 + $3 = $8, not $18.
• DIncorrect. Variable cost would be $5, far below the $18 transfer price.

Common trap: Seeing a price other than the $15 headline figure may suggest a negotiated price, unless you add the 20% selling cost.

In practice: Auditors review intercompany pricing for fairness to divisional performance measurement and for tax and regulatory compliance.

Remember: When the transfer price equals the external price (including normal selling costs), it is market-based.

Drafted with AI assistance and checked against the answer key.