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Minimum transfer price

A supplying division’s minimum transfer price for a decision is relevant incremental cost of the transfer plus opportunity cost of the best alternative use forgone. With genuine spare capacity and no other consequence, the opportunity component may be zero. The buying division also has a maximum based on external alternatives and other relevant effects. Distinguish an economically acceptable decision range from the reporting price used for long-term performance or tax purposes.

Worked example

With incremental cost $12 and no displaced work, minimum is $12. If the unit displaces an external sale earning $5 contribution, minimum rises to $17.

Common mistake

Do not add full external selling price as the opportunity cost when the displaced sale also avoids costs; use the relevant benefit forgone.

Where it appears in your exams

QualificationExamRelationshipPeriod
ACCA PM Direct September 2026–June 2027