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Which TWO of the following bases for setting a transfer price are most likely to
result in goal congruent behaviour by BOTH the selling and receiving
divisions?Options:
A. Opportunity cost
B. Market price
C. Actual cost
D. Standard full cost plusI am literally confused about this question..
Can you explain me why the Option A and B is true in a convenient way?Using these two bases helps ensure that both divisions are motivated to act in the best interest of the company as a whole, leading to goal congruence.
Opportunity cost reflects the profit that the selling div A could have earned by selling the product externally instead of transferring it internally. Therefore by considering op cost both divisions are motivated to make decisions that align with the overall profitability of the company.
Whilst setting the transfer price at market price ensures that the selling division receives a fair price for its product, similar to what it would earn in the external market. This approach encourages both divisions to act in a way that maximises their profits while also aligning with the company’s overall goals.
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