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(Q) Division B of a company makes units which are then transferred to other divisions. The
division has no spare capacity, and sells units externally as well as internally.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.A) (1) only
B) (2) only
C) Neither (1) nor (2)
D) Both (1) and (2)Option B is the right answer
Hello tutor!!!
Why is this 2nd statement is true because in my point of view transfer is only worthwhile if the income of a transfer is greater than the net income of an external sales and also covering marginal cost. However, in the statement above they didn’t take account marginal cost so I thought they are saying that income from transfer should be enough to cover lost contribution that’s it. In the statement above they didn’t talk about marginal cost then how this statement is true ?The net income is after subtracting the marginal cost.
Have you watched my lectures on this because one of the examples that I work through specifically deals with a problem such as this.
Tutor they are saying that transfer price is worthwile if it is greater than opportunity cost so my question is if you sell something to somebody you will cover then marginal cost then you will cover the lost contribution but in the 2nd statement they are saying that you need to cover just opportunity cost.
By ‘income’ in the second statement they are meaning the net income.
Again, have you watched my lectures on this?
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