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Which approach to setting transfer pricing uses the price at which the selling unit could sell...

Which approach to setting transfer pricing uses the price at which the selling unit could sell the product or service to external buyers?

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Answer #1

Market based prices approach is where the selling department transfers the product or service at which it could sell it to external buyers.

It is based on opportunity costs concept. The opportunity cost approach conveys that the correct transfer price is the market price since the selling department can sell all that it produces to external buyers at that price. In such a case, transferring internally at a lower price would not be overall beneficial to the company.3

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