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In a company with a divisionalised structure, Division A transfers its output to Division B. Division A produces just one item, Component X. Division B makes and sells and end product that requires one unit of Component X.
……………………………………………………………………………………$per unit of X
Marginal cost of production in Division A ………………………………..8
Fixed overhead cost of production…………………………………………3
Market price in the external market ………………………………………..16
Division B contribution from further processing Component X…25
before deducting the transfer costDivision A is not working at full capacity, and can meet in full the external market demand and the demand from Division B for internal transfers.
What should be the minimum transfer price per unit and the maximum transfer price per unit for Component X in this situation?
A) Minimum transfer price $8, maximum transfer price $16
B) Minimum transfer price $8, maximum transfer price $25
C) Minimum transfer price $11, maximum transfer price $16
D) Minimum transfer price $11, maximum transfer price $25The correct answer is B. Why is the maximum price $25? Why does it assume that Division B cannot buy from external at $16.
Strictly you have a valid point.
However, for the exam never assume that the receiving division can buy in the external market unless the question specifically says so.
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