Answer
A market-based transfer price is optimal when the external market for the product is perfectly competitive, there are minimal interdependencies among subunits, and there are no additional costs or benefits from transacting internally versus externally.
Work Step by Step
A market-based transfer price is considered optimal under the following conditions:
1. Perfectly Competitive Market: The external market for the intermediate product is perfectly competitive, meaning there is no market power or influence by any participant. Prices in this market reflect true supply and demand dynamics.
2. Minimal Interdependencies: There are minimal interdependencies or interactions between subunits within the organization. Subunits operate independently, and their actions have little impact on each other.
3. No Additional Costs or Benefits: There are no additional costs or benefits to the company as a whole from buying or selling in the external market instead of transacting internally. In other words, using the external market doesn't incur extra expenses, and there are no unique advantages to internal transactions.
