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Sir i have a doubt in the following question:
193) Division B of a company makes units which are then transferred to other divisions. The division has no spare capacity.
Which of the following statement(s) regarding the minimum transfer price that will encourage the divisional manager of B to transfer units to other divisions is/are true?(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.
i understand why the first statement is false. But cannot understand why the second statement is true. Because I feel that the income generated from internal transfer even if just equal to income generated from an external sales, is going to be worthwhile for the selling division(it remains even with the two options).
so could you please shed light on this aspect?
Many thanks sir!
You are correct that the manager will be indifferent to selling externally or transferring to the other division.
However, then question asks about the transfer price that will encourage the manager to transfer to the other division. Being indifferent is not encouraging him – he will only be encouraged is he gets more.
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