Answer (B) is correct . The optimal transfer price of a selling division should be set at a point that will have the most desirable economic effect on the firm as a whole while at the same time continuing to motivate the management of every division to perform efficiently. Setting the transfer price based on actual costs rather than standard costs would give the selling division little incentive to control costs.
Answer (A) is incorrect because Inefficiencies are charged to the buying department.
Answer (C) is incorrect because By definition, cost-based transfer prices are not adjusted by some markup.
Answer (D) is incorrect because Cost-based transfer prices provide the advantages of clarity and administrative convenience.
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