When a division has idle production capacity, variable cost is the transfer price that leads to optimal decision making.

Question

Quizplus · Accepted Answer

When a division has idle production capacity, the variable cost is generally the lowest cost the division can produce at. Setting the transfer price at the variable cost will ensure optimal decision-making, as it will not cause the selling division to lose money and the buying division to obtain the product at a fair price. Therefore, the statement is true.

When a Division Has Idle Production Capacity, Variable Cost Is