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Performance measurement and controlTransfer PricingOpportunity Cost

ACCA · Question 27 · 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 is operating at full capacity and cannot meet Division B's needs without diverting units away from external customers, 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. Opportunity cost = External Selling Price - Marginal Cost.

Full Answer

When operating at full capacity, every unit transferred internally means one less unit sold externally. Opportunity Cost = Lost Contribution = Selling Price ($80) - Variable Cost ($50) = $30. Minimum Transfer Price = Variable Cost ($50) + Opportunity Cost ($30) = $80. (Or simply, the external market price).

Common mistakes

Stating $50 (ignoring opportunity cost) or $75 (confusing the supplying division's minimum with the receiving division's maximum).
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