ExpertEasy2 marksShort Answer
ACCA · Question 28 · 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.
Regardless of Division A's capacity, what is the MAXIMUM transfer price that Division B will be willing to pay? (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.
Regardless of Division A's capacity, what is the MAXIMUM transfer price that Division B will be willing to pay? (Enter your answer as a whole number, without the $ sign)
How to approach this question
The maximum transfer price is the lower of the net marginal revenue of the final product or the external purchase price of the component.
Full Answer
The receiving division (Division B) will never willingly pay more for an internal transfer than the price at which they can acquire an identical component from an external market. Since they can buy it externally for $75, this sets the absolute ceiling (maximum) for the transfer price.
Common mistakes
Stating $80 (Division A's selling price). Division B doesn't care what A sells it for; B only cares what B has to pay externally.
Practice the full ACCA PM — Performance Management Practice Exam 6
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