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Please could I have some help on question 178 on transfer pricing.
I can see that Division A has limited production capacity, and therefore I would have thought that the transfer price would be $12, + any lost contribution but I can’t seem to understand how the answer is worked out
Thanks so much
For each unit transferred to Division B, Division A there will be:
Marginal (variable) cost incurred – $8
Opportunity cost $4 (i.e. 12 – 8)
Variable saving – $1.50
i.e. $10.50 per unit
In general terms, where there is a full capacity and an external market price, the transfer price will be the market price; only adjusted, as in this case, for any saving arising due to the transfer being internal rather than external.