Comments

  1. 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.

  2. Profile photo of Chris says

    **sighhhh**

    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!

  3. Profile photo of nzeadall says

    Hello, I would be grateful if anyone could help me on my question sent on 15th Oct 2013. This is jeopardising my whole concept of opportunity cost. If we are sacrificing a contribution but then on the other hand we are gaining on the alternate choice. So, the lost contribution should be the NET loss, NOT the full loss, isn’t it? I still think we should charge $1 (4-3) per hour of lost contribution and not the full $4.

    Kindly someone comment on this please.
    Thanks

    • Profile photo of John Moffat says

      Sorry your earlier comment was not answered, but it is not possible for us to read all comments on all lectures. If you want to ask a question of a tutor (as opposed to just making a comment) then it is best asked on the ‘Ask ACCA Tutor’ forums – questions there are always answered within 24 hours.

      Your earlier comment is replied to below.

      • Profile photo of nzeadall says

        Thank you very much Sir, I really appreciate, ok, next time I’ll post on forums.
        Thank you for the below reply I have now understood. This is the best ACCA website I’ve ever known. May God bless you and your team.

  4. Profile photo of nzeadall says

    Helo open tuition team, thank you very much for the excellent explanation however I have a small question regarding question 8, I see that Arsian10 raised a similar question on this. For the lost contribution, can’t we calculate it in a similar way like “opportunity cost” ? according to me for every ONE product of Y we can make TWO product of X. So, in that 10h of labour we are sacrificing the manufacture of TWO products X. So, contribution for 2 product X would be $40 wheras contribution for ONE product Y is $30. The lost contribution is therefore $40-$30 = $10. so then transfer pricing = $70 + $10 = $80.
    I note that the EXTERNAL price = $100. (having a transfer price of $110 is technically not possible isn’t it?)
    I would be very grateful if you could respond to this. Once again thank you very much

    • Profile photo of John Moffat says

      You are perfectly correct that for every one unit of Y that we make we are losing two units of X, and so what we are losing is 2 x $20 = $40.
      We are only therefore prepared to make Y provided that we get from Y the $40 that we are losing by not making X’s.
      In order to be getting $40 from making Y we need to be charging $70 (the marginal cost) + $40 = $110.

      The lost contribution is indeed the opportunity cost – making Y is ‘costing’ them the $40 that they are losing by not being able to make X. It is no different that looking at an ‘opportunity cost’ of $4 per hour (which is the way we usually choose between products when there are limited hours available – key factor analysis).

      A transfer price of $110 is perfectly possible! At $100 division A is not prepared to produce product Y for anyone – they prefer to produce product X. If someone (anyone) is prepared to pay $110 (or more) then (and only then) they are quite happy to produce it.

    • Profile photo of John Moffat says

      Look at the syllabus on the ACCA website. The only real change is the addition of a bit on information for performance management. However there is not much (and there is a chapter in our course notes).

    • Profile photo of opsy4ril says

      @imboo, lool check the Acca websites for past papers then review the papers year on year or in any order (depends what works for you) to find related questions on Transfer Pricing. Simple! hope that works for you.

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