In the Bombadier 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: $\begin{array}{lrr}&\text {Case 1 }&\text {Case } 2\
\text { Division A: } & & \
\text { Capacity in units } & 100,000 & 100,000 \
\text { Number of units sold externally } & 100,000 & 60,000 \
\text { Market selling price } & \$ 90 & \$ 75 \
\text { Variable costs per unit } & 73 & 58 \
\text { Fixed costs per unit based on capacity } & 10 & 10\\
\text { Division } B:\
\text { Number of units needed for production } & 40,000 & 40,000 \
\text { Purchase price per unit from external supplier } & \$ 91 & \$ 74
\end{array}$ The company uses the opportunity cost approach to transfer pricing. What is the maximum transfer price in Case 2?
A)$75
B)$68
C)$74
D)$58

Question

Quizplus · Accepted Answer

In Case 2, the maximum transfer price is the market selling price of $75 per unit. This is because the opportunity cost approach to transfer pricing considers the next best alternative forgone by selling internally. Since Division A can sell the product externally for $75, this becomes the maximum price at which it would be willing to transfer the product to Division B.

In the Bombadier Company, Division a Has a Product That