ExpertMedium1 markMultiple Choice
CPA · Question 19 · Area I: Business Analysis
Division A produces a part that it sells to outside customers for $40. Variable cost is $22, and fixed cost is $10 per unit. Division B wants to purchase 1,000 units from Division A. Division A is operating at full capacity. What is the minimum transfer price Division A should accept?
Division A produces a part that it sells to outside customers for $40. Variable cost is $22, and fixed cost is $10 per unit. Division B wants to purchase 1,000 units from Division A. Division A is operating at full capacity. What is the minimum transfer price Division A should accept?
Answer options:
A.
$22
B.
$32
C.
$40
D.
$42
How to approach this question
Determine if there is excess capacity. If Full Capacity: Min Price = Market Price. If Excess Capacity: Min Price = Variable Cost.
Full Answer
C.$40✓ Correct
C
Since Division A is at full capacity, selling to Division B means displacing outside sales. The minimum transfer price must cover the variable cost ($22) plus the opportunity cost of the lost contribution margin ($40 - $22 = $18). $22 + $18 = $40.
Common mistakes
Ignoring opportunity cost; using full cost ($32).
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