ACCA Applied Knowledge · Management Accounting · Performance measurement - application
Division X makes a component with variable cost $30 and full cost $45 per unit. It sells externally at $60 per unit and is operating at full capacity. Division Y wants to buy the component internally. Using the general rule for the minimum transfer price, what should the minimum price be?
The minimum transfer price equals marginal cost plus opportunity cost. With full capacity, selling internally loses a $30 external contribution, so the minimum is $30 plus $30, giving $60. The $30 figure would apply only if there were spare capacity.
- A$60Correct
- B$45
- C$30
- D$75
Explanation
Minimum transfer price = marginal cost + opportunity cost. At full capacity, each internal unit forgoes an external sale contribution of 60 - 30 = $30, so the minimum is 30 + 30 = $60. $30 would apply only with spare capacity, and $45 uses full cost incorrectly.
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