CMA Intermediate · Management Accounting · Transfer Pricing
Which of the following is a primary objective of setting a transfer price between divisions of the same company?
A key objective of transfer pricing is achieving goal congruence while enabling fair evaluation of divisional performance. The price should motivate managers to make decisions that benefit the whole company and also maintain divisional autonomy, rather than favouring one division or ignoring commercial reality.
- AMaximise the selling division's profit at the buying division's expense
- BAchieve goal congruence while allowing fair evaluation of divisional performanceCorrect
- CEliminate all external sales of the divisions
- DMinimise the total tax by ignoring commercial considerations
Explanation
Transfer prices should lead divisional managers to act in the company's overall interest (goal congruence), while permitting fair assessment of each division's performance and preserving autonomy. Favouring one division or ignoring commercial considerations defeats these aims.
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