Page 145 - APM Integrated Workbook STUDENT S18-J19
P. 145
Divisional performance appraisal and transfer pricing
Scenario 2: The selling division has surplus capacity
Transfer price
negotiated between
Minimum price selling division Maximum price buying
will accept is marginal cost.* division will pay, lower of:
net marginal revenue i.e. selling price
external purchase price
of product. final product less marginal cost of
buying division’s final product.
* Note:
This is the minimum price. The selling division may also want to cover some/all
of the fixed costs and recognise a % profit.
The standard cost should be used rather than the actual cost to aid planning
and prevent inefficiencies being passed on to the buying division.
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