US CMA Part 1 · Chapter 3 · Question 19 of 30
The Motor Division sells its component externally for $50, with variable cost of $32 per unit, including $3 of variable selling costs that are avoided on internal transfers. The division is operating at full capacity and could sell everything it produces externally. What is the minimum acceptable transfer price?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) $47
Explanation
Minimum transfer price = variable cost of an internal sale + contribution given up on the lost external sale. Variable cost of an internal unit = $32 - $3 = $29. Opportunity cost = $50 - $32 = $18. Minimum = $29 + $18 = $47, i.e. the market price less the avoided selling costs.
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