The market price is the most appropriate transfer price to be charged by one department to another in the same organization for a service provided when:
The market price is the most appropriate transfer price to be charged by one department to another in the same organization for a service provided when:
The market price is the most appropriate transfer price to be charged between departments within the same organization when there is an external market for that service. This is because the external market price represents the fair value that could be obtained if the service were sold outside the organization. Setting the transfer price at the market price ensures that the selling department is adequately compensated, reflecting an opportunity cost of not selling externally, and that internal transactions are conducted at a price comparable to competitive external transactions.
Pls explain.
When there is an external market to service, it means the selling department could sell to the market at that price. If it sells to the purchasing department at a lower price, it is not maximizing its revenue.
If there is no tax benefit, there is no incentive to buy or sell in-house.