When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred,what is the lowest acceptable transfer price as far as the selling division is concerned?
A) Variable cost of producing a unit of product.
B) The full absorption cost of producing a unit of product.
C) The market price charged to outside customers, less any costs saved by transferring internally.
D) The amount that the purchasing division would have to pay an outside seller to acquire a similar product for its use.

Question

Quizplus · Accepted Answer

The lowest acceptable transfer price for the selling division is the market price charged to outside customers, less any costs saved by transferring internally. This ensures that the selling division is not losing out on potential profits from outside customers and is being fairly compensated for the product being transferred. The variable cost of producing a unit of product (A) does not take into account fixed costs and may not be sufficient to cover all expenses. The full absorption cost of producing a unit of product (B) includes fixed costs but may result in a price that is too high for the purchasing division. The amount that the purchasing division would have to pay an outside seller to acquire a similar product for its use (D) may not accurately reflect the value of the internally transferred product.

When the Selling Division in an Internal Transfer Has Unsatisfied