In the Ambros Company,Division A has a product that can be sold either to outside customers or to Division B.Information about these divisions is given below: $\begin{array}{lrr}
\text { Division A: }&\text { Case } 1&\text { Case } 2\
\text { Capacity in units } & 100,000 & 100,000 \
\text { Number of units sold externally } & 100,000 & 60,000 \
\text { Market selling price } & \$ 90 & \$ 75 \
\text { Variable costs per unit } & 73 & 58 \
\text { Fixed costs per unit based on capacity } & 10 & 10\
\
\text { Division B: }\
\text {Number of units needed for production}&40,000&40,000\
\text {Purchase price per unit from external supplier}&\$91&\$74
\end{array}$
The company uses the opportunity cost approach to transfer pricing.What is the maximum transfer price in Case 1?
A)$73
B)$83
C)$90
D)$91

Question

In the Ambros Company,Division A has a product that can be sold either to outside customers or to Division B.Information about these divisions is given below: $\begin{array}{lrr}
\text { Division A: }&\text { Case } 1&\text { Case } 2\
\text { Capacity in units } & 100,000 & 100,000 \
\text { Number of units sold externally } & 100,000 & 60,000 \
\text { Market selling price } & \$ 90 & \$ 75 \
\text { Variable costs per unit } & 73 & 58 \
\text { Fixed costs per unit based on capacity } & 10 & 10\
\
\text { Division B: }\
\text {Number of units needed for production}&40,000&40,000\
 \text {Purchase price per unit from external supplier}&\$91&\$74
\end{array}$
 The company uses the opportunity cost approach to transfer pricing.What is the maximum transfer price in Case 1?
A)$73
B)$83
C)$90
D)$91

Quizplus · Accepted Answer

The maximum transfer price under the opportunity cost approach in Case 1 is the market selling price of $90 plus the opportunity cost. Since Division A can sell all its units externally at $90, it foregoes this amount by selling internally. However, Division B is willing to pay up to $91 (the external supplier's price), making $91 the maximum transfer price that Division A could charge Division B, ensuring Division A is no worse off.

In the Ambros Company,Division a Has a Product That Can