Hamilton has excess capacity. If the company wishes to implement the general transfer-pricing rule, the opportunity cost would be equal to:
A) zero.
B) the direct expenses incurred in producing the goods.
C) the total difference in the cost of production between two divisions.
D) the sum of the variable cost plus the fixed cost.

Question

Quizplus · Accepted Answer

The general transfer-pricing rule states that transfer price should be set at the market price, which represents the opportunity cost. In this scenario, Hamilton has excess capacity and is not foregoing any alternative uses of its resources. Therefore, the opportunity cost is zero.

Hamilton Has Excess Capacity