When there is excess production capacity, there is no opportunity cost to the company and the transfer price under the general rule is only the outlay cost.

Question

Quizplus · Accepted Answer

When there is excess capacity, the opportunity cost is zero because the company is not foregoing any other production. Therefore, the transfer price can be set at the outlay cost, which is the variable cost of producing the goods.

When There Is Excess Production Capacity, There Is No Opportunity