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The question 296 asks what transfer price should be negotiated when theres no external market. The answer provided is Full Cost.
I don’t understand why transfer price at full cost would be charged without adding any desired profit margin. (Cost plus).
Because if they are selling at cost they are not making any profit.
I explain in my lectures why a cost plus approach is not a sensible way of determining a transfer price.
Transferring at full cost will be used for the negotiation of the transfer price – it would be the minimum that Division A would be prepared to charge.