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Perrin 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 $700 per unit.
The same grade of materials and labour is used in both products. The cost cards for each
product are shown below:
Product Y X
($)/unit ($)/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?
A $270
B $750
C $590
D $840Good day sir,Pls i need help with how the opportunity cost was gotten in this question
This is just like a question that I work through in my free lectures on transfer pricing. Have you watched the lectures?
The minimum transfer price is marginal cost of X plus the lost contribution from not being able to make Y (which is 6 hours per unit at the contribution per hour from Y).
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