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).

I thought the minimum transfer price the seller should have set is VC so 拢30+ any lost in contribution which is 拢40= 70
But the answers says that the minimum price Division A should charge is 40.

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.)

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.

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.)

ogunseye says

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

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).

Silvialaura says

Hello Sir,

I have a question on 5.

I thought the minimum transfer price the seller should have set is VC so 拢30+ any lost in contribution which is 拢40= 70

But the answers says that the minimum price Division A should charge is 40.

Could you explain?

Silvialaura says

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?

Regards

John Moffat says

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

Hey sir,

Could you tell me how we arrived at maximum price of 50 as transfer price in the 4th question.

John Moffat says

It is B’s net marginal revenue of $70 less $20.

(Did you watch my free lectures on transfer pricing first?)

Farheen Kadeeja says

okay sir thank you.

John Moffat says

You are welcome 馃檪

Gary says

Hi John

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.

John Moffat says

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.)

Hemraj says

Sir, could you explain how to arrive at the answer for question 3

Sydney says

cant view all the questions in full. the other part is cut.

opentuition_team says

it should be OK now