If the selling subunit is operating at capacity, the opportunity cost of transferring a unit internally rather than selling it externally is equal to the market price minus the variable cost.

Question

Quizplus · Accepted Answer

When the selling subunit is operating at capacity, there is no room to produce more units and sell them externally. Therefore, transferring a unit internally rather than selling it externally has an opportunity cost equal to the market price minus the variable cost. The opportunity cost is the value of the forgone alternative, which in this case is the market price that could be earned by selling the unit externally. The variable cost is the cost of producing the unit, which is already incurred regardless of whether it is sold internally or externally. Therefore, the correct statement is that the opportunity cost of transferring a unit internally rather than selling it externally is equal to the market price minus the variable cost.

If the Selling Subunit Is Operating at Capacity, the Opportunity