ICAEW BIP · Chapter 5 · Question 2 of 9
Division A makes a component with a variable cost of £26 per unit and a fixed cost of £8 per unit. It sells the component externally for £50. Division A has plenty of spare capacity, and fixed costs will not change if it supplies Division B. What is the minimum transfer price per unit that Division A should accept for supplying Division B?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) £26
Explanation
Minimum transfer price = marginal cost of supplying + opportunity cost. With spare capacity there are no lost external sales, so the opportunity cost is nil. The minimum is the variable cost of £26. Fixed costs are not relevant because they do not change.
More Transfer pricing MCQs
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