Briefly describe the conditions that should be met for market-based transfer pricing to lead to optimal decision making among subunits of a large organization. Notice that, when supply outstrips demand, market prices may drop well below their historical averages. What are distress prices and which transfer prices should be used for judging performance if distress prices prevail?

Market based transfer pricing should be made only when it leads to the highest total profit for all sub units collated as a consolidated results of the entire organization.

Explanation:

Distress prices signal a markdown in the price of a good to sustain its production in the face of prevailing fall in prices.

When supply outstrips demand and sales slows down, continuing the production of the item is preferable as it covers some of the fixed costs of the product.

The distress price is the variable cost of the product plus a minimum mark-up.

The dual transfer prices should be used for judging performance if distress prices prevail