Richmond Corporation has no excess capacity. If the firm desires to implement the general transfer-pricing rule, opportunity cost would be equal to:

Question

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Opportunity cost is the potential benefit that is given up when choosing one option over another. In this case, if the firm desires to implement the general transfer-pricing rule, it means that the divisions will need to transfer goods between them at a price that is equivalent to what they would receive if they were to sell them externally. Therefore, the opportunity cost would be the contribution margin forgone from lost external sales, which represents the potential benefit that the division could have received if they had sold those goods externally.

Richmond Corporation Has No Excess Capacity