Under the general guideline for transfer pricing, the minimum transfer price will vary depending on whether the supplying division has unused capacity." Do you agree? Explain.

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Part 1

A.

Yes. The general transfer-pricing guideline specifies that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer plus the opportunity cost per unit to the supplying division. When the supplying division has idle capacity, its opportunity cost per unit is zero; when the supplying division has no idle capacity, its opportunity cost per unit is positive. Hence, the minimum transfer price will vary depending on whether the supplying division has idle capacity or not.

B.

Yes. The general transfer-pricing guideline specifies that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer minus the opportunity cost per unit to the supplying division. When the supplying division has idle capacity, its opportunity cost per unit is negative; when the supplying division has no idle capacity, its opportunity cost per unit is zero. Hence, the minimum transfer price will vary depending on whether the supplying division has idle capacity or not.

C.

Yes. The general transfer-pricing guideline specifies that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer plus the opportunity cost per unit to the supplying division. When the supplying division has idle capacity, its opportunity cost per unit is positive; when the supplying division has no idle capacity, its opportunity cost per unit is zero. Hence, the minimum transfer price will vary depending on whether the supplying division has idle capacity or not.

D.

No. The general transfer-pricing guideline specifies that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer. Opportunity cost is not factored into the price, therefore, the minimum transfer price will not vary depending on whether the supplying division has idle capacity or not.