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January 11, 2017 at 9:50 am
The last question, about the transfer price at goal congruent,how did the minimun price arrive at 40 please??
Although I can see a 40 in the question, but I do not understand why its at 40
John Moffat says
January 11, 2017 at 11:16 am
The minimum transfer price = marginal cost + any lost contribution.
The marginal cost is $30, and since there is limited capacity and unlimited external demand, there is a lost contribution of 40 – 30 = $10 from not being able to sell externally.
So a total of $40.
I do suggest that you watch my free lectures because I work through a virtually identical example (among lots of other examples on transfer pricing).
December 1, 2016 at 2:39 pm
I have a question on 5.
I thought the minimum transfer price the seller should have set is VC so £30+ any lost in contribution which is £40= 70
But the answers says that the minimum price Division A should charge is 40.
Could you explain?
December 1, 2016 at 2:47 pm
What I am thinking is that to get to the 40 I do VC+ LOST IN CONTR = 30+(40-30) = 40, is my procedure correct?
December 1, 2016 at 3:06 pm
No – you are not correct.
There is no lost contribution because A has unlimited production capacity, and there is limited external demand from A.
Therefore the minimum transfer price is simply the marginal cost.
There is only going to be lost contribution when the transferring division has limited production capacity.
(Have you watched my free lectures on transfer pricing? Because this example is virtually identical to one of the examples I work through (and explain) in my lectures.)
Farheen Kadeeja says
September 4, 2016 at 10:59 pm
Could you tell me how we arrived at maximum price of 50 as transfer price in the 4th question.
September 5, 2016 at 7:29 am
It is B’s net marginal revenue of $70 less $20.
(Did you watch my free lectures on transfer pricing first?)
September 6, 2016 at 5:16 pm
okay sir thank you.
September 6, 2016 at 5:36 pm
You are welcome 🙂
December 2, 2015 at 4:38 pm
Can you work through the question on the division selling products X and Y, where there is limited labour. It is not making sense to me. I am not sure I understand the question. Can you please walk through it.
The answer is taking the contribution per unit of the product we are not transferring and multiplying it by the hours spent making the product we are transferring,this is added to the maginal cost.
December 2, 2015 at 5:28 pm
If they were not transferring product Y then they would produce X instead and sell externally getting a contribution per hour of $4.
If they do transfer Y then they need as always to cover the marginal cost (100) plus the lost contribution. Since each unit of Y takes 10 hours to make, they are losing contribution that could have been made from selling X of 10 x $4 = $40.
Therefore the minimum transfer price has to be $140 per unit.
(It seems as though you are not bothering to watch the lectures, because I go through an almost identical example in the lecture.)
November 27, 2015 at 1:46 pm
Sir, could you explain how to arrive at the answer for question 3
November 24, 2015 at 10:27 am
cant view all the questions in full. the other part is cut.
November 24, 2015 at 11:07 am
it should be OK now
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