1. a. The lowest acceptable transfer price from the perspective of the sell-
ing division is given by the following formula:
Total contribution margin
on lost sales
Variable cost
Transfer price ≥ per unit + Number of units transferred
Since there is enough idle capacity to fill the entire order from the Hi-
Fi Division, no outside sales are lost. And since the variable cost per
unit is $42, the lowest acceptable transfer price as far as the selling
division is concerned is also $42.
Transfer price $42 + $0 = $42
≥
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