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: The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 1?
A) $90
B) $73
C) $83
D) $86

Question

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:  The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 1?
A) $90 
B) $73 
C) $83 
D) $86

Quizplus · Accepted Answer

To find the minimum transfer price in Case 1, we need to calculate the opportunity cost of selling to outside customers. 
Division A can sell 100 units to outside customers at a price of $300 per unit, which will generate a total revenue of $30,000. 
But if Division A sells 100 units to Division B, then Division B can generate a revenue of $260 per unit by selling those units to outside customers, which will generate a total revenue of $26,000. 
So, the opportunity cost of selling to Division B is $30,000 - $26,000 = $4,000. 
Therefore, the minimum transfer price for Division A to sell to Division B should be $300 - $40 = $260. 
Thus, the correct answer is B - $73, which is the lowest option given that is greater than $260.

In the Bombadier Company, Division a Has a Product That