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Hi
If we have two products x and y
and and we are told to calculate the transfer price of X to B and we have given the apportioned fixed costs
so for calculating the opportunity cost we should not include the apportioned fixed cost because it is not variable cost
so for this question it will be Opportunity cost foregone 320 plus the variable cost of X 270=590
is my calculation correct??
Thanks
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QPerrin Co has two divisions, A and B.
Division A has limited skilled labour and is operating at full capacity making product Y. It has been asked to supply a different product, X, to division B. Division B currently sources this product externally for $700 per unit.
The same grade of materials and labour is used in both products. The cost cards for each product are shown below:
Product
Y
($)/unit
X
($)/unit
Selling price
600
–
Direct materials ($50 per kg)
200
150
Direct labour ($20 per hour)
80
120
Apportioned fixed overheads ($15 per hour)
60
90
Using an opportunity cost approach to transfer pricing, what is the minimum transfer price?
I think …. To calculate the minimum transfer price for product X, we need to consider the opportunity cost foregone by division A by not selling product Y externally.
The opportunity cost foregone is the contribution margin of product Y, which is the selling price ($600) minus the variable costs ($200 for direct materials, $80 for direct labor, and $15 for apportioned fixed overheads).Therefore, the minimum transfer price for product X would be the opportunity cost foregone ($320) plus the variable cost of product X ($270), which equals $590 per unit.
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