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, the opportunity cost for Division A is the revenue it generates from selling to outside customers, which is $80 ($100 - $20). 
The opportunity cost for Division B is the cost it incurs to produce the product, which is $6 ($8 - $2). 
Therefore, the maximum transfer price should be set at the opportunity cost for Division A, which is $80. 
Option A, B and D are lower than the opportunity cost for Division A, which will lead to a loss for Division A. Therefore, option C is the best choice.

In the Bombadier Company, Division a Has a Product That