ExpertMedium2 marksMultiple Choice
ACCA · Question 35 · Performance Measurement
Section A
GlobalTech Multinationals has two divisions: Division A produces microchips and Division B uses them to make laptops. Division A is operating at full capacity and can sell all its microchips externally for $50 each. The variable cost to produce a microchip is $30. What is the minimum transfer price Division A should accept to supply Division B?
Section A
GlobalTech Multinationals has two divisions: Division A produces microchips and Division B uses them to make laptops. Division A is operating at full capacity and can sell all its microchips externally for $50 each. The variable cost to produce a microchip is $30. What is the minimum transfer price Division A should accept to supply Division B?
Answer options:
A.
$30
B.
$50
C.
$20
D.
$80
How to approach this question
When a supplying division is at full capacity, the minimum transfer price is the external market price, because they must be compensated for the lost external sale (opportunity cost).
Full Answer
B.$50✓ Correct
Because Division A is at full capacity, every unit transferred internally means one less unit sold externally. The minimum transfer price must cover the variable cost ($30) plus the opportunity cost of lost contribution ($50 - $30 = $20). Therefore, the minimum transfer price is $50.
Common mistakes
Selecting the variable cost ($30), forgetting that opportunity cost must be included when at full capacity.
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