Answer (D) is correct . Transfer prices should promote congruence of subunit goals with those of the organization, subunit autonomy, and managerial effort. Although no rule exists for determining the transfer price that meets these criteria in all situations, a starting point is to calculate the sum of the additional outlay costs and the opportunity cost to the supplier. Given no idle capacity and a competitive external market (all goods transferred internally can be sold externally), the sum of the outlay and opportunity costs will be the market price.
Answer (A) is incorrect because Using flexible budget cost as a transfer price provides no motivation to the seller to control costs and no reward for selling internally when an external market exists.
Answer (B) is incorrect because Using incremental cost as a transfer price provides no motivation to the seller to control costs and no reward for selling internally when an external market exists.
Answer (C) is incorrect because Market price is preferable to a budgeted or actual cost with or without a markup (unless the markup equals the profit earned by selling externally).
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