When a supplying profit center is operating at full capacity, the minimum transfer price should be:
A) Enough to cover all fixed and variable per-unit costs
B) Enough to cover all variable per-unit costs and any contribution margin lost by dropping customers
C) Enough to cover all variable per-unit costs
D) Enough to generate a reasonable gross profit
E) None of the above

Question

Quizplus · Accepted Answer

When a supplying profit center is operating at full capacity, the minimum transfer price should be enough to cover all variable per-unit costs and any contribution margin lost by dropping customers. This ensures that the supplying division does not lose profit by transferring goods internally rather than selling them externally.

When a Supplying Profit Center Is Operating at Full Capacity