Answer :
Market based transfer pricing :
Market based transfer pricing is the transfer pricing which is
based on market value of product in open market. It is mainly based
on fair value of product in market.
The disadvantages of market price transferring
are-
- Market price may change frequently and there is an uncertainity
about market conditions.
- Market prices don't consider the capacity at which business is
operating . This leads to company to not to sell its product.
- External market may not be perfectly competitive. In Perfect
competition market prices are not affected by any single producer
but in other forms of market it does.It raises inequality in market
and due to this different market rate prevails.
- Highly specialised products are not suitable for market based
transfer pricing.
- Difficulty in matching up the opportunity cost associated with
different products.