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 maximum transfer price in Case 2?
A) $75
B) $68
C) $74
D) $58

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 maximum transfer price in Case 2?
A) $75 
B) $68 
C) $74 
D) $58

Quizplus · Accepted Answer

In Case 2, Division A can either sell the product to outside customers at $80 or sell to Division B at a transfer price. Division B can either use the product to generate a contribution margin of $50 or sell it at $60 to outside customers. Therefore, Division B's opportunity cost of using the product is $60, which is higher than the outside selling price of Division A. Hence, Division A should sell the product to outside customers and the maximum transfer price is equal to the outside selling price of Division A minus the opportunity cost of Division B, which is $80 - $6 = $74.

In the Bombadier Company, Division a Has a Product That