Answer
A limitation of full-cost-based transfer prices is that they can lead to suboptimal decisions for the company as a whole. This may result in the company choosing external sourcing over internal sourcing, even when it's more profitable to do the latter. Additionally, the supplying division might lack incentives to control costs if full-cost transfer prices use actual costs rather than standard costs. This can lead to decisions that prioritize divisional actions over overall company profitability.
Work Step by Step
A limitation of full-cost-based transfer prices is that they can lead to suboptimal decisions for the company as a whole. This may result in the company choosing external sourcing over internal sourcing, even when it's more profitable to do the latter. Additionally, the supplying division might lack incentives to control costs if full-cost transfer prices use actual costs rather than standard costs. This can lead to decisions that prioritize divisional actions over overall company profitability.
