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Where a perfect external market price exists and unit variable costs and selling prices remind constant the opportunity cost of transfer will be external market price or external market price less selling costs.
Sir I don’t understand why this statement is true?? Shouldn’t it be false, because the opportunity cost should be the contribution foregone not the market price itself.
Could you throw some light in this regard sir?
Thank you
I don’t know where you found this question but it is annoying because it is really just trying to trick by playing with words.
Certainly the sensible transfer price will be the marginal cost plus the lost contribution.
However that is not quite what the question is asking. If they transfer something to the other division then they are losing the market price that they could have received by selling externally, so this is an opportunity cost. Obviously depending on what transfer price they end up deciding on determines whether or not it is better to transfer to the other division or not.
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