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Medium2 marksMultiple Choice
Performance Measurement and ControlTransfer PricingDivisional PerformanceSyllabus Area E
This question is part of a case study — click to read the full scenario(Case 26)

Section B - Case 3: Quantum Nexus

Quantum Nexus is a cross-border tech hardware company.
Division A (located in Country X) manufactures microchips. Division B (located in Country Y) assembles these chips into smartphones.

Division A Data:
Variable cost per chip = $120
Fixed cost per chip = $30
External market selling price = $200

Division B Data:
External purchase price for similar chips = $190
Variable processing cost to assemble phone = $50
Final selling price of smartphone = $300

Division A currently has SPARE CAPACITY and can meet Division B's demand without losing external sales.

What is the minimum transfer price Division A should accept?

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ACCA · Question 27 · Performance Measurement and Control

Section B - Case 3: Quantum Nexus

Quantum Nexus is a cross-border tech hardware company.
Division A (located in Country X) manufactures microchips. Division B (located in Country Y) assembles these chips into smartphones.

Division A Data:
Variable cost per chip = $120
Fixed cost per chip = $30
External market selling price = $200

Division B Data:
External purchase price for similar chips = $190
Variable processing cost to assemble phone = $50
Final selling price of smartphone = $300

What is the maximum transfer price Division B should be willing to pay?

Answer options:

A.

$250

B.

$190

C.

$200

D.

$300

How to approach this question

Calculate Net Marginal Revenue (Final SP - Div B variable costs). Compare this to the external purchase price. The maximum Div B will pay is the lower of these two.

Full Answer

B.$190✓ Correct
The maximum transfer price is set by the receiving division (B). It is the lower of: 1. The external market purchase price ($190). 2. Net Marginal Revenue (Final Selling Price - Div B Variable Costs = $300 - $50 = $250). Since Division B can buy the chips externally for $190, they will not pay Division A a penny more than $190.

Common mistakes

Choosing the Net Marginal Revenue ($250) and forgetting that an external market exists.
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