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Hello Mr John,
Can you please clarify how they solve for the transfer price in part B question 3 of JUN 2014 exam,
Thanks for all your help,
C currently satisfies 60% of the external demand and sells 8,010, and so it could sell an extra 8,010/60 x 40 = 5,340 externally. So the have to charge at least 5,340 if they are selling these to W.
The rest of the current sales to W are 7550 – 5,340 = 2,210. These could not be sold externally, and so these could be sold to W at anything more than the marginal (variable) cost, which is 40% x 2210 = 884.So in total they have to charge W at least 5340 + 884 = 6224.
I hope that helps.
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