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)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 should be the market price charged to outside customers, less costs saved by transferring internally. This is because if the selling division is able to sell the product to outside customers at a certain price, it should not transfer the product internally at a lower price. However, if costs are saved by transferring internally (such as transportation costs or marketing costs), these savings should be taken into account when determining the transfer price. Choosing A or B would result in the selling division potentially losing out on higher revenue from selling to outside customers, while choosing D does not take into account any potential cost savings from internal transfer.

When the Selling Division in an Internal Transfer Has Unsatisfied