US CMA Part 1 · Chapter 3 · Question 18 of 30
The Motor Division makes a component with variable cost of $32 per unit and allocated fixed cost of $9 per unit. It sells the component externally for $50. The division has substantial idle capacity. What is the minimum transfer price it should accept for internal sales to another division?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $32
Explanation
Minimum transfer price = incremental (variable) cost per unit + opportunity cost per unit. With idle capacity, no external sales are given up, so the opportunity cost is zero and the minimum is $32. Allocated fixed costs are not incremental.
More Performance Management MCQs
- Q20When a multinational company sets transfer prices between subsidiaries in different countries, tax authorities generally require that the…
- Q21A division reports operating income of $360,000, sales of $3,000,000 and average invested capital of $2,400,000. What is its return on…
- Q22A division has operating income of $360,000 and average invested capital of $2,400,000. The company's required rate of return is 11%. What…
- Q23A division currently earns an ROI of 18%. Its manager is considering a project expected to earn 15% on its investment. The company's cost…
- Q24A division measures invested capital at net book value. If operating income and all other factors stay constant, what happens to the…