ExpertMedium2 marksShort Answer
ACCA · Question 10 · Performance measurement and control
Section A
GlobalChem has two divisions. Division A produces a chemical compound and transfers it to Division B. Division A has spare capacity. The variable cost of production in Division A is $25 per liter. The external market price for the compound is $40 per liter. Division B can buy the compound externally for $38 per liter.
What is the minimum transfer price per liter that Division A should accept? (Enter your answer as a whole number).
Section A
GlobalChem has two divisions. Division A produces a chemical compound and transfers it to Division B. Division A has spare capacity. The variable cost of production in Division A is $25 per liter. The external market price for the compound is $40 per liter. Division B can buy the compound externally for $38 per liter.
What is the minimum transfer price per liter that Division A should accept? (Enter your answer as a whole number).
How to approach this question
Determine the marginal cost to the supplying division. Since there is spare capacity, there is no opportunity cost.
Full Answer
The minimum transfer price is the marginal cost of production plus any opportunity cost. Because Division A has spare capacity, it does not lose any external sales by transferring internally. Therefore, the opportunity cost is zero. Minimum transfer price = Variable Cost ($25) + $0 = $25.
Common mistakes
Using the external market price ($40) or the external purchase price for Division B ($38).
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