Question4(f) [1 mark] Assume that Bottle Division has the capacity to produce 100,000 bottles. Demand in the external market is 50,000 bottles. But Syrup Division has ordered 75,000 bottles and firm policy is that internal demands must be met first. What is the transfer price that Bottle Division should charge to Syrup Division based on the general transfer pricing rule? A. $2.02 B. $2.55 C. $2.00 D. $2.16 E. $2.50 ResetMaximum marks: 1 Flag question undefinedBlackTom题目解析单项选择题
A
A. $2.02
B
B. $2.55
C
C. $2.00
D
D. $2.16
E
E. $2.50

Question

Question4(f) [1 mark] Assume that Bottle Division has the capacity to produce 100,000 bottles. Demand in the external market is 50,000 bottles. But Syrup Division has ordered 75,000 bottles and firm policy is that internal demands must be met first. What is the transfer price that Bottle Division should charge to Syrup Division based on the general transfer pricing rule? A. $2.02 B. $2.55 C. $2.00 D. $2.16 E. $2.50 ResetMaximum marks: 1 Flag question undefinedBlackTom题目解析单项选择题

A

A. $2.02

B

B. $2.55

C

C. $2.00

D

D. $2.16

E

E. $2.50

BlackTom AI · Accepted Answer

We start by restating the scenario to ensure clarity: Bottle Division can produce up to 100,000 bottles. External market demand is 50,000 bottles. Syrup Division has ordered 75,000 bottles, and internal demand must be met first according to policy. The question asks for the transfer price Bottle Division should charge Syrup Division based on the general transfer pricing rule.

Option A (2.02) claims a price far below the external market price; choosing such a low transfer price would not reflect the value of using Bottle Division’s capacity, nor the internal-priority policy. It would overly subsidize the internal transfer and ignore opportunity costs.

Option C (2.00) and Option D (2.16) are also below the external price of 2.50. Any transfer price well below the external market price fails to compensate Bottle Division for the incremental value of using its capacity, especially when capacity is constrained and internal demand takes precedence.

Option E (2.50) sets the transfer price exactly at the external market price. While this at first glance seems fair, it neglects the internal-priority policy’s effect on capacity allocation. If Bottle Division could sell all 100,000 units externally, price equal to external market would be appropriate, but here internal demand is prioritized and external demand is limited to 25,000 units (since internal orders first consume 75,000 of capacity 100,000, leaving 25,000 for external sales). Therefore, simply charging the external price does not capture the value of internal allocation.

Option B (2.55) posits a transfer price slightly above the external market price. Under a general transfer pricing rule when capacity is constrained and internal demands must be met first, the transfer price often incorporates the external price plus a small premium to reflect the opportunity cost of using capacity for internal transfer rather than for external sales, and to compensate for the internal transfer decision. This results in a transfer price that motivates Bottle Division to allocate capacity to Syrup Division while still recognizing the value of external opportunities. The 0.05 premium (2.55) is a modest adjustment that aligns with the concept of opportunity cost and the internal priority policy.

To summarize the differential reasoning: with 100,000 capacity and internal demand of 75,000, only 25,000 can be sold externally. The transfer price should thus reflect not just the external price (2.50) but also the internal opportunity cost or premium arising from prioritizing internal allocation over external sales. Among the options, 2.55 is the one that embodies this logic, whereas the other values either undervalue the internal transfer (A, C, D) or exactly match external price without accounting for internal priority (E).