ICAEW BIP · Chapter 5 · Question 4 of 9
Division B buys a component from Division A, which has spare capacity. Division B can buy an identical component from an outside supplier for £44 per unit. Division B adds further variable costs of £30 per unit and sells the finished product for £90. What is the maximum transfer price Division B should be willing to pay Division A?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) £44
Explanation
The maximum transfer price is the lower of the external purchase price (£44) and the net marginal revenue the buying division earns from the component (£90 - £30 = £60). Division B would not pay more than £44 because it could buy the same component outside for that price.
More Transfer pricing MCQs
- Q6Which of the following is a practical limitation of using market price as a transfer price?
- Q7A group sets transfer prices at full cost plus 20%. The full cost of a component is £34 per unit. What is the transfer price?
- Q8Division X sets a transfer price of £60 per unit for a component it makes for Division Y. Division X has spare capacity, and its variable…
- Q9Under a dual pricing system for transfers between divisions, what happens?
- Q1Which of the following is a main objective of a transfer pricing system in a divisionalised company?