Using the market price to set transfer prices may not be the best approach when the selling division has idle capacity.
What is market price?
The price at which a good or service can currently be purchased or sold is known as the market price. The dynamics of supply and demand influence the market price of a good or service. The market price is the cost at which the quantity supplied and the amount demanded are equal.
What is transfer price?
When billing another division, subsidiary, or holding company for services delivered, a transfer price is calculated based on market rates. Companies employ transfer pricing to lessen the parent company's overall tax burden.
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