• Profile photo of John Moffat says

      We would prefer to make X at the current prices because it gives the biggest contribution per hour.

      If we make Y then we are losing production of X and therefore the lost contribution for every hour is the contribution per hour that we could have made by producing X instead.

      (If you haven’t watched the chapter on Throughput accounting then do, because the first part of it goes through key factor analysis which is the reason we would prefer X to Y at the current prices.)

  1. avatar says

    Dear John,

    in the last example, i ma interested in knowing whether we could ascertain the maximum transfer price. Could you explain whether this limit is applicable and how to calculate it?

    thanks !

  2. Profile photo of Ofafa says

    This is just great. Thanks to OT guys am enjoying the lectures and studying at the comfort of my living room time is 2 a.m in the morning. everything else is sssshhhhhh. can only hear the ticking of the wall clock.

  3. avatar says

    Dear Mr John,

    Thank you for becoming my friend and one of the most favourite teachers ???? Hope I would be able to say in the nearest future – I passed F5 thanks to Mr John and OT ????

  4. avatar says

    tnks a lot open tuition, last example really cracked my head but later figured it out

    My explanation.

    If division chooses to make product y they would be loosing $1($4-$3) profit which is not ideal for the organization, so they chose to make y ay x amount since they earn the highest contribution from y

    Hope i’m correct

  5. Profile photo of Chris says

    Hi John,

    just a quick question. Do we charge the full contribution lost on the last example because we CAN make both? I initially done the question charging the marginal cost +£10 as this was the difference in lost contribution…

    I can see how you have ended up with £70 + £40 but can also see my logic…. Could you pretty please explain….

    Thank you again…

    • Profile photo of John Moffat says

      If we did not supply the other division then we would prefer the make the one with the highest contribution per hour and would therefore be making $10 per hour.

      If instead we use hours making the product for the other division, then because there are limited hours we would be losing $10 for every hour that we took away to make the product for the other division.

  6. avatar says

    Hi, the final example where product X’s income generated per hour was used for a question which was required to complete the minimum transfer price for Y? Could you please explain as to why the opposing products figure was used rather than the one which would have been required.

    • Profile photo of John Moffat says

      If Division B did not exist, then A would prefer to use the limited hours making product X (because X gives the biggest contribution per hour (key factor analysis)).

      B wants Y, but if A makes Y then every hour they use to make Y’s takes away hours that could have been used to make X’s and therefore loses them contribution of $4 per hour. They will only be prepared to produce Y provided it earns them at least $4 per hour.

  7. Profile photo of Chris says


    It’s Sunday, the sun is shining and I am in studying!!! All i can say though is that these lectures are a great help and funnily enough make me want to studying more that what i was originally without using OT.

    Great jobs guys and keep it up! Top Notch!

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