Question

A market price (i.e., the price charged for an item on the open market) is often regarded as the best approach to the transfer pricing problem... Pros vs Cons?

Answer 1

The market price system is often regarded as the best approach to the transfer pricing problem in business. Pros of using market price as the transfer pricing method include efficient dissemination of information and ease of understanding. However, cons include potential inaccuracies and distortions in market prices.

Step-by-step explanation:

The market price system is often regarded as the best approach to the transfer pricing problem in business.

Pros of using market price as the transfer pricing method include:

• Efficient dissemination of information about relative scarcities of goods, services, labor, and financial capital
• Prices are neutral, flexible, efficient, and easy to understand
• Market participants do not need to know the reasons behind price changes, only the changes themselves

Cons of using market price as the transfer pricing method include:

• Market prices may not accurately reflect the true value or cost of a good or service
• Market prices can be influenced by factors such as market power or externalities, which may result in distortions
• Market prices may not be appropriate for evaluating transfer pricing within a company if there are no comparable transactions in the open market