ExpertEasy2 marksShort Answer
ACCA · Question 26 · Performance measurement and control
Section B - Case 3: Nordic Components
Nordic Components is a multinational manufacturer. Division A (located in Country X) manufactures electric motors. Division B (located in Country Y) manufactures e-bikes and uses one motor per bike.
Division A's variable cost per motor is $50. It currently sells motors to external customers for $80. Division B currently buys identical motors from an external supplier for $75.
If Division A has ample spare capacity to meet Division B's needs without losing any external sales, what is the minimum transfer price Division A should accept? (Enter your answer as a whole number, without the $ sign)
Section B - Case 3: Nordic Components
Nordic Components is a multinational manufacturer. Division A (located in Country X) manufactures electric motors. Division B (located in Country Y) manufactures e-bikes and uses one motor per bike.
Division A's variable cost per motor is $50. It currently sells motors to external customers for $80. Division B currently buys identical motors from an external supplier for $75.
If Division A has ample spare capacity to meet Division B's needs without losing any external sales, what is the minimum transfer price Division A should accept? (Enter your answer as a whole number, without the $ sign)
How to approach this question
Minimum Transfer Price = Marginal Cost + Opportunity Cost. With spare capacity, opportunity cost is zero.
Full Answer
The minimum transfer price from the supplying division's perspective is the marginal cost of production plus any opportunity cost of lost external sales. Since Division A has spare capacity, there are no lost external sales, so the opportunity cost is $0. Therefore, the minimum transfer price is simply the variable cost of $50.
Common mistakes
Stating $80 (the external selling price) even though there is spare capacity.
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