If the Selling Division Has Excess Capacity, the Transfer Price

question 105

Multiple Choice

If the selling division has excess capacity, the transfer price should be set at its:

• A) outlay costs.
• B) outlay costs plus the foregone contribution to the organization of making the transfer internally.
• C) selling price less the variable costs.
• D) selling price less the variable costs plus the foregone contribution to the organization of making the transfer internally.

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Definitions:

Fixed Costs

Fixed costs are those business expenses that do not change with the level of goods or services produced, such as rent.

Break-even Sales

The amount of revenue needed to cover both the fixed and variable costs of a business, resulting in no profit or loss.

Unit Selling Price

The price at which a single unit of product is sold, not including any discounts or promotions.

Unit Variable Costs

The variable costs associated with producing one unit of a product, including materials, labor, and any other variable expenses.