Final answer:
To motivate the production department to sell internally, the company should use a transfer pricing strategy that favors the production technology with the lowest total cost. This strategy should account for changes in input costs, such as an increase in machine costs, favoring a more labor-intensive approach.
Step-by-step explanation:
In order for the production department at capacity to be motivated to sell internally, the company should recommend a transfer pricing policy that aligns with the production department's interests and the company's overall objectives. Adopting a transfer pricing strategy that reflects the production technology with the lowest total cost would be beneficial. This decision is particularly relevant when there's a change in input costs, such as an increase in the cost of machines, which would lead to a shift towards a more labor-intensive production process to minimize costs. Therefore, the firm should consider factors like cost of labor, cost of machines, and demand for products to determine the appropriate production technology, volume of output, pricing strategy, and employment levels. By leveraging these considerations, the firm can choose between expanding or reducing production, setting optimal prices, opening or closing facilities, hiring or laying off workers, and deciding whether to start selling new products or discontinuing existing ones.