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PM Chapter 18 Questions Transfer Pricing
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All questions are too good for concept
Rule for determining the minimum transfer price
Sir, in question 4, why doesn’t the minimum transfer price take “limited external demand from A” into account? I thought the minimum transfer price would be $40 if A had some degree of demand externally.
It doesn’t make sense to me to transfer all goods to B for $30 p.u. (the minimum transfer price in this question) when you can make $10 profit outside even if the demand is limited??
A has unlimited production capacity, so they can sell externally as many are required (and the number externally is limited). They can’t sell any more externally but they can produce more and sell them to the other division and selling them to the other division at anything more than $30 will give them extra profit.
Have you watched my free lectures on this because I work through an almost identical example in the lectures and obviously explain the logic?
So after there is no more to supply externally due to the limited external demand, the subsequent goods will be transferred to other departments at anything more than $30 to give A an extra profit. But in the case of question 5, the transfer price must be more than $40 since A can sell goods externally as many as they want at $40 each. I watched your lectures and they are very helpful. Thank you!
Yes, that is correct 馃檪
Hello sir,
Are there any workings for question 4?
Kind regards
A has unlimited production capacity and therefore the minimum TP is the marginal cost of $30.
B has net marginal revenue of 70 – 20 = 50, and therefore that is the maximum TP.
Have you watched the free lectures on this?
Sir In Question No 3,
We are giving up the Contribution of X ($4 per hour + 100 SP) because the business needs Y. So we only Produce Y & stop producing X??
In question 3, I didn’t quite understand why the marginal cost is 100 and not 80?
As you are looking to transfer product Y to another department, therefore you would use the marginal cost of product Y, not X.
So Y is being transferred to the other division, That’s why the Minimum Price should be > 100 & the Greater contribution lost is $4 per hour so $40( 10×4) becomes our opportunity cost !! Thanks man !! Clear now !!
In question 2, why is the buying cost of $350 must be subtracted with marginal cost of $240?
Because if Q buys from outside they will pay 350 and P will no longer be making it which will save costs of 240. So it will be costing the company an extra 110.