CableTech's Suburban Division is currently purchasing a part from an outside supplier. The company's Metro Division, which has no excess capacity, makes and sells this part for external customers at a variable cost of $20 and a selling price of $32. If Metro begins sales to Suburban, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $4. On the basis of this information, Metro would establish a transfer price of:

Question

Quizplus · Accepted Answer

Using the general transfer pricing rule, the transfer price should be set at the variable cost plus the opportunity cost, which is the profit that Metro could have made by selling the product externally.

Since Metro currently sells the part for $32 externally, the opportunity cost is $32 - $20 = $12.

Therefore, the transfer price would be $20 + $12 = $32. However, if Metro can reduce variable cost on internal transfers by $4, then the transfer price should be reduced by that amount.

Thus, the final transfer price would be $32 - $4 = $28.

CableTech's Suburban Division Is Currently Purchasing a Part from an Outside