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Market price acts as an incentive for the selling division to use up any spare capacity or acts as a disincentive?
It depends whether or not the market price is higher or lower than the marginal cost!
Exactly was my point too sir! but apparently it seems its false. It acts as disincentive as companies tend to have narrow margins in external market, so selling division covering barely its costs would loathe to have external price as transfer price. Atleast thats what the BPP study text says…
The question as you wrote it in your first post makes no mention whatsoever of transfer prices.
Nor does it suggest that the other division wants more.
I guess the question actually had more than you wrote, but if the other division is getting all they want and if the selling division still has spare capacity then obviously they will want to sell it externally if the external price is more than the marginal cost.
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