QUESTION TWO

A. In what situations should the transfer price be the external market price? (10 Marks)

B. How should the transfer price be established when there are diseconomies of scale and prices have to be lowered to increase sales volume? (10 Marks)

C. What is the ideal transfer price? (5 Marks)

D. In what circumstances should the transfer price be standard variable cost plus opportunity cost of making the transfer? (10 Marks)

E. Discuss the advantages and disadvantages of Market Price Based Transfer Prices and Cost Based Transfer Prices. Further, outline the main variants that exist under each method. (15 Marks)