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Apple Co operates a transfer pricing system between two divisions based on market price. Are the following statements about this true or false?
The market price acts as an incentive to use up any spare capacity in the selling division of Apple Co.
Using the market price as the transfer price encourages selling and buying decisions which appear to be in the best interests of the division’s performance. This leads to the company as a whole achieving optimal results as each division optimises its performance.
Sir why the 1st statement is false
The market price does not always act as an incentive to use up any spare capacity in the selling division of Apple Co.
This is because the market price may contain some undesirable mark-up for the selling division, and they may prefer to go for some opportunity cost instead, which would become an incentive for them.
Also if the selling division has spare capacity, they may not necessarily need any additional incentive to use it up.
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