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 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 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 would be the market price charged to outside customers less any costs saved by transferring internally. This is because the selling division could sell the product to an outside customer at the market price and earn a higher profit margin. Therefore, the transfer price needs to be lower than the market price to provide incentive for the purchasing division to buy from the selling division rather than purchasing from an outside supplier.

When the Selling Division in an Internal Transfer Has Unsatisfied