Division A has variable manufacturing costs of $25 per unit and fixed costs of $5 per unit.Division A is operating at capacity,what is the opportunity cost of an internal transfer when the market price is $35?
A)$5
B)$10
C)$25
D)$30
E)$35

Question

Quizplus · Accepted Answer

The opportunity cost of an internal transfer is the contribution margin that Division A could earn by selling the product on the external market. 
Contribution Margin = Selling Price - Variable Costs 
Contribution Margin = $35 - $25 = $10 
Therefore, the opportunity cost of an internal transfer is $10 per unit. Since the market price is higher than the variable costs, Division A should transfer the units internally only if the receiving division is willing to pay more than $10 per unit. Option (B) is the closest to the opportunity cost, so it is the best choice.

Division a Has Variable Manufacturing Costs of $25 Per Unit