Other transfer price methods require internally generated information and the information that is needed for transfer pricing decisions is information that is needed for other purposes as well and is probably already produced by the company.
Externally generated information is required for market-based transfer pricing.
When the transfer price is based on the costs of production, the producing department has no incentive to control costs. Therefore, because there is no need to control costs, inefficiencies may creep into the process over time.
Market conditions being imposed within the company are a result of a market-based transfer price.
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