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Division B of a company makes units which are then transferred to other divisions. The
division has no spare capacity. The following statements have been made regarding the
minimum transfer price that will encourage the divisional manager of B to transfer units to
other divisions:
(1) Any price above variable cost will generate a positive contribution, and will therefore
be accepted.
(2) The division will need to give up a unit sold externally in order to make a transfer,
this is only worthwhile if the income of a transfer is greater than the net income of an
external sale.
Which of the above statement(s) is/are true?– The answer is statement 2.
-Could you explain why statement 1 is not true?
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