ExpertMedium2 marksMultiple Choice
ACCA · Question 14 · Performance measurement and control
Section A
GlobalChem has two divisions: Division A produces a chemical compound that can be sold externally or transferred to Division B. Division A is currently operating at full capacity and selling all its output to the external market for $50 per unit. The variable cost of production is $30 per unit.
Division B wants to buy the compound from Division A. If Division A transfers internally, it saves $2 per unit in packaging costs.
What is the minimum transfer price Division A should accept?
Section A
GlobalChem has two divisions: Division A produces a chemical compound that can be sold externally or transferred to Division B. Division A is currently operating at full capacity and selling all its output to the external market for $50 per unit. The variable cost of production is $30 per unit.
Division B wants to buy the compound from Division A. If Division A transfers internally, it saves $2 per unit in packaging costs.
What is the minimum transfer price Division A should accept?
Answer options:
A.
$30
B.
$48
C.
$50
D.
$52
How to approach this question
Use the general rule for transfer pricing: Minimum TP = Marginal Cost to the supplying division + Opportunity Cost of the transfer.
Full Answer
B.$48✓ Correct
The minimum transfer price is the price at which the supplying division (A) is no worse off.
Since A is at full capacity, every internal transfer loses an external sale.
Opportunity cost (lost contribution) = External Price ($50) - Variable Cost ($30) = $20.
Marginal cost of internal transfer = $30 - $2 (packaging savings) = $28.
Minimum TP = Marginal Cost + Opportunity Cost = $28 + $20 = $48.
(Shortcut: External selling price minus cost savings = $50 - $2 = $48).
Common mistakes
Forgetting to deduct the cost savings from the external price, resulting in $50.
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