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Is it true that maximum transfer price can be calculated as either:
a) Net marginal revenue which is the external selling price minus marginal cost of producing the product. OR
b) buy-in price externallyI have seen in the old exam question [Rotech Co] where the discount is minus from the marginal cost of $7550 where 5% of discount is deducted to get the maximum transfer price of $7172.5, but my question is that whether the discount is deducted from net marginal revenue minus marginal cost minus discount to get maximum transfer price?
Please correct me where I’m wrong!
The maximum transfer price is the lower of the net marginal revenue (which is the external selling price less the marginal cost incurred in that division), and the external buy-in price. (It is not a choice – it is the lower of the two).
In Rotech, the discount is being offered by the external supplier and so reduces the external buy-in price.
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