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Which of the following statements about market-based transfer prices are correct?
(i) A profit centre buying the item is likely to be indifferent between buying externally and buying the item from within the business.
(ii) A transfer price at market value might not encourage profit centres buying the item to utilise spare capacity.
A (i) only B (ii) only C Both (i) and (ii) D Neither (i) nor (ii)
Can you explain me if point number 2 is wrong or right?
The second statement is true. The buying centre is encouraged to buy if the transfer price is lower than the net marginal revenue and lower than the market price, as explained in my lectures.