Question 1

Section A

AutoParts Ltd has two divisions: Engine and Assembly. Engine division produces a component with a variable cost of $40. It sells this component externally for $70. Engine division currently has spare capacity and can meet all external demand as well as the internal demand from Assembly division.

What is the minimum transfer price the Engine division should accept from the Assembly division?

Accepted Answer

Apply the general rule for transfer pricing: Minimum TP = Marginal Cost + Opportunity Cost. Since there is spare capacity, opportunity cost is zero.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Selecting $70, forgetting that opportunity cost only applies when capacity is fully utilized.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA PM — Performance Management Practice Exam 1

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