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Hi teacher, is the statement correct?
“Where a perfect external market price exists and unit variable costs and unit selling prices are
constant, the opportunity cost of transfer will be external market price or external market price less savings in selling costs.”
i think the opportunity cost will be contribution foregone less savings in selling costs not external market price.
This statement is taken from BPP kit 281 no. question. Book says the mentioned statement is correct but i think the statement is false. can u explain me why it is correct?The statement is correct.
By choosing to sell to the other division, they are losing the income that they could have got from selling externally (less the saving in selling costs).
(We normally write the minimum transfer price as being the marginal cost plus any lost contribution, but this is the same figure in this situation as the lost external selling price.)
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