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A division of a company is capable of making two products-X and Y.
They can sell both products externally as follows:
X Y
External selling price 80 100
variable cost 60 70
contribution per unit 20 30
Labor hour per unit 5 hour 10 hourthe company has limited labour available, and another division requires product Y.
What is the minimum transfer price that should be charged by the devision in order to achieve goal congruence?
1 $110 2, $100 3, $80 4, $70
the right answer is $110, I don’t know why, would you please teach me?
many thanks
jingdongyu
13/11/2014If we forget the other division for the moment, then they can either sell X or Y.
X gives a contribution of 20/5 = $4 per hour; Y gives a contribution of 30/10 = $3 per hour.Because of the limited labour they would prefer to make X and would earn $4 on every hour.
The other division wants Y, and as usual the minimum transfer price is the marginal cost plus any lost contribution. The marginal cost of a Y is $70. However every hour used to make Y’s would be losing hours that could have been used to make X’s and earn $4 per hour.
So the minimum TP is 70 + (10 hours x $4) = $110
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