Market based and opportunity cost approach - part 2

In this lesson

1. 0:00 Introduction to minimum transfer pricing
2. 1:00 Identifying spare capacity and opportunity costs
3. 2:03 Calculating minimum transfer price formula
4. 3:35 Multi-tier transfer pricing with limited capacity
5. 5:50 Opportunity cost approach explained
6. 7:16 Two-tier pricing structure in practice

About this lesson

This video explores two key scenarios: when spare capacity exactly matches internal demand (resulting in no opportunity cost), and when internal demand exceeds spare capacity (requiring a two-tier pricing structure). You'll see how opportunity costs only arise when the supplying division must forgo external sales, and understand why transfer prices can differ depending on production volume. This is essential for Performance Management and Advanced Performance Management papers, where transfer pricing decisions directly impact divisional profitability and decision-making.

Duration: 9m