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Performance Measurement and ControlTransfer PricingDivisional PerformanceSyllabus Area E

ACCA · Question 26 · Performance Measurement and Control

Section B - Case 3: Quantum Nexus

Quantum Nexus is a cross-border tech hardware company.
Division A (located in Country X) manufactures microchips. Division B (located in Country Y) assembles these chips into smartphones.

Division A Data:
Variable cost per chip = $120
Fixed cost per chip = $30
External market selling price = $200

Division B Data:
External purchase price for similar chips = $190
Variable processing cost to assemble phone = $50
Final selling price of smartphone = $300

Division A currently has SPARE CAPACITY and can meet Division B's demand without losing external sales.

What is the minimum transfer price Division A should accept?

Answer options:

A.

$120

B.

$150

C.

$200

D.

$190

How to approach this question

Apply the general rule for minimum transfer price: Marginal Cost + Opportunity Cost. If there is spare capacity, Opportunity Cost is zero.

Full Answer

A.$120✓ Correct
The minimum transfer price is set by the supplying division (A). The formula is Marginal Cost + Opportunity Cost. Because Division A has spare capacity, transferring units to B does not displace external sales, so the opportunity cost is $0. Therefore, the minimum transfer price is simply the variable cost of $120.

Common mistakes

Adding fixed costs to the minimum transfer price (full cost pricing), which leads to sub-optimal decision making.
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