Question
Asked Dec 22, 2019
14 views

“Under the general guideline for transfer pricing, the minimum transfer price will vary depending on whether the supplying division has unused capacity or not.” Do you agree? Explain.

check_circle

Expert Answer

Step 1
help_outline

Image Transcriptionclose

Transfer Pricing: This refers to a process of pricing in which one sub-unit of an organization charges a price to another sub-unit for supplying a product or service to the sub-unit of the same organization.

fullscreen
Step 2
help_outline

Image Transcriptionclose

Under the general guideline for the transfer pricing, the minimum transfer price depends on whether the supplying division has the unused capacity or not. This can be explained as follows: The minimum transfer price is equal to the sum of the incremental cost per unit incurred up to the point of transfer and the opportunity cost per unit to sell. Here, the incremental costs mean the extra cost of manufacturing and exchanging the product or service. Here, the opportunity cost refers to that contribution margin, which is dropped by the selling subunit at that time when the product and service. • If the capacity is not used, there will be no opportunity cost and if the selling sub-unit is at the operating capacity, the opportunity cost of exchanging a unit inside instead of selling it externally is equivalent to the market price from which variable cost is deducted. So, the minimum exchange price affect the opportunity cost per unit because it depends on the supply division whether it has capacity used or unused.

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.

Related Accounting Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Dillin Inc. reported the following on the company’s statement of cash flows in Year 2 and Year 1:   ...

A:  

question_answer

Q: Assume the perpetual inventory system is used unless stated otherwise. Round all numbers to the near...

A: Periodic inventory system: The method or system of recording the transactions related to inventory o...

question_answer

Q: A corporation issued $2,000,000 of 20-year bonds for cash at 98. How would the transaction be report...

A: Statement of cash flows: It is one of the financial statements that shows the cash and cash equivale...

question_answer

Q: Alternate cost structures, uncertainty, and sensitivity analysis. Corporate Printing Company current...

A: 1. Company’s breakeven point under the current leasing agreement

question_answer

Q: Robin had the following capital transactions in 2018: LTCG $10,000 LTCL 8,000 STCG 2,000 STCL - 0 - ...

A: a.The capital loss of 2017 is carry forwarded to 2018 as a long-term capital loss. Therefore, Person...

question_answer

Q: Berkshire Hathaway, the investment holding company of Warren Buffett, reports its “less than 20% own...

A: Equity investment: Equity investments are the stock instruments which claim ownership in the investe...

question_answer

Q: On the basis of the following stockholders’ equity accounts, indicate the items, exclusive of net in...

A: Cash Flow StatementCash flow statement is a report that depicts the cash inflows and outflows from o...

question_answer

Q: The comparative balance sheet of Navaria Inc. for December 31, 20Y3 and 20Y2, is as follows: Please ...

A: Reconcile the amount of net income with cash flows from operating activities.

question_answer

Q: Lovato Motors Inc. has cash flows from operating activities of $720,000. Cash flows used for investm...

A: Free cash flow: