Question

The "floor" in transfer pricing is

the transfer price that would leave the buying division no worse off if an input is purchased from an internal division.
the transfer price that would leave the selling division no worse off if the good is sold to an internal division.
the transfer price that would give the selling division its normal profit.
the transfer price that would give the buying division a price break compared to purchasing from an outside company.

Answer 1

The "floor" in transfer pricing is the transfer price that would leave the buying division no worse off if an input is purchased from an internal division and gives the buying division a price break compared to purchasing from an outside company.

Step-by-step explanation:

In transfer pricing, the "floor" is the transfer price that would leave the buying division no worse off if an input is purchased from an internal division. It is the transfer price that would give the buying division a price break compared to purchasing from an outside company.

For example, let's say a company has two divisions: Division A and Division B. Division A produces a component that Division B needs to complete its final product. The floor transfer price is the price at which Division B can purchase the component from Division A, so that Division B is better off than if it were to purchase the component from an outside supplier.

This concept ensures that internal transactions are beneficial for both the buying and selling divisions and promotes efficiency within the company.