A selling division is working at full capacity. Each component transferred internally means one external sale is lost. The component has a variable cost of £12 and sells externally for £20 with no extra selling costs. What is the minimum transfer price?
Answer and explanation
Correct answer: D. £20
- Step 1: At full capacity, the transfer displaces an external sale.
- Step 2: Minimum transfer price = marginal cost + opportunity cost = £12 + (£20 - £12) = £20.
Answer
£20.
Why not the others: £12 ignores the contribution lost by not selling externally. £8 is only the lost contribution, and omits the marginal cost. £16 is not related to the marginal cost or the opportunity cost.
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