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

Question

Quizplus · Accepted Answer

If the selling division has unsatisfied demand from outside customers, it means that the product has a market price that the selling division can charge to those customers. Therefore, the lowest acceptable transfer price for the selling division should be the market price charged to outside customers, less any costs saved by transferring the product internally. This ensures that the selling division does not lose out on potential profits from external customers, and also takes into account the cost savings from transferring internally.

When the Selling Division in an Internal Transfer Has Unsatisfied