ICAEW BIP · Chapter 5 · Question 3 of 9
Division A makes a component with a variable cost of £26 per unit and sells all its output externally for £50 per unit. It is working at full capacity. Variable selling costs of £2 per unit would be saved on any internal transfers to Division B. What is the minimum transfer price per unit that Division A should accept?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) £48
Explanation
With no spare capacity, every unit transferred means one external sale is lost. Minimum transfer price = variable cost of the internal unit (£26 - £2 saved = £24) + contribution lost on the external sale (£50 - £26 = £24) = £48. This is the same as the market price less the selling costs saved.
More Transfer pricing MCQs
- Q5If the buying and selling divisions are in the same tax jurisdiction, how does an increase in the transfer price for a component traded…
- 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?