Question

The compressor division at Norco Corporation can buy the coils it requires either from the company's coil division or from the market. Assuming the coil division has enough idle capacity to satisfy the compressor division’s requirements, which of the following will be the lower limit for setting the transfer price between the two divisions?

a. Selling price per unit of the coil division.
b. Cost of buying from outside suppliers for compressor division.
c. Variable cost of production for coil division.
d. Average opportunity cost of lost sales for coil division.

Answer 1

c.

Step-by-step explanation:

Based on the information provided within the question it can be said that the lower limit for setting the transfer price will be the variable cost of production for coil division. This is because the coil division price for it's coils is what is being looked at since it is determined by their production output and their capacity to meet the compressor division's requirements.