ACCA Applied Knowledge · Management Accounting · Performance measurement - application
Division A makes a component with a variable cost of $30 and sells externally at $50. Division B wants to buy the component internally. Division A has spare capacity. What is the minimum transfer price that Division A should accept, and what would it be if Division A were at full capacity selling all output externally?
The minimum is $30 with spare capacity and $50 at full capacity. The minimum transfer price equals marginal cost plus opportunity cost. With spare capacity no contribution is lost, while at full capacity the $20 external contribution is forgone, so the minimum equals the $50 market price.
- A$30 with spare capacity; $50 at full capacityCorrect
- B$50 with spare capacity; $30 at full capacity
- C$30 with spare capacity; $80 at full capacity
- D$20 with spare capacity; $50 at full capacity
Explanation
The minimum transfer price is marginal cost plus opportunity cost. With spare capacity there is no lost contribution, so the minimum is $30. At full capacity the opportunity cost is the lost external contribution of $20, giving $30 + $20 = $50. The $80 option wrongly adds the selling price to variable cost.
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