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Hi sir. when considering the minimum transfer price, is it only to consider the marginal cost of production from transferring division and maximum transfer price is the contribution gained on the selling the product in the external market instead of selling to another division. Am I correct?
But for the revision kit Q.280, it is asking the minimum transfer price. why does the contribution of selling in the external market need to add up (opportunity cost), but the question does not mention about the limited capacity. And for Q.294, the minimum transfer price is directly referred to the marginal cost whereas the maximum transfer price refers to the contribution gained in the external market. What is the difference between them?
Q280 does specifically state that Division A is working at full capacity.
Q294 The minimum transfer price is determined by the division doing the transferring and is the marginal cost plus any lost contribution.
The maximum transfer price is determined by the division receiving the transfer and is the lower of the net marginal revenue and any external purchase price.Noted…if the question mentions if the division is working at full capacity, we do need to also consider the opportunity cost of selling in the external market. And the maximum transfer price is considered from receiving division which is lower of marginal revenue or the purchase price from the external market.
Thank you
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