To calculate ____________, the selling division's unit opportunity cost is added to the unit incremental cost incurred up to the transfer point?
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Answer: D. minimum transfer price
Explanation
The minimum transfer price is calculated by adding the selling division's unit opportunity cost to the unit incremental cost up to the transfer point. This ensures the selling division is no worse off by transferring goods internally rather than selling externally. It sets the absolute floor for internal pricing negotiations. Transfer pricing governs the monetary terms when one subunit sells goods or services to another subunit within the same company. Opportunity costs arise when the selling division must give up external sales to fulfill internal transfers. Incremental costs represent the additional out-of-pocket expenses of production.
Multinational corporations use transfer pricing rules to coordinate decentralized divisions and evaluate managerial performance. Setting proper minimum and maximum transfer prices prevents sub-optimal decision-making. It aligns divisional self-interest with overall company profitability. Maximum transfer price is capped by the buying division's external purchase price or net realizable value. Minimum operating cost and maximum operating costs relate to general operations rather than transfer pricing formulas.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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