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For the b section of this question, the examiner states that variable costs represent 40% of revenue. My question is why is the variable cost of revenue 40% of $2,210,000 and not 40% of $8,010,000?
Thank you.
The transfers need to be split into two parts. For those that could be sold externally (5.34M) the transfer price is marginal cost plus lost contribution, which is the external selling price of 5.34M.
The remainder of the transfers (2.21M) cannot be sold externally, and so their transfer price is simply the marginal cost, which is 40% x 2.21M.
So the total transfer price has to be at least 5.34M + (40% x 2.21M) = 6.224M
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