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Hi
I was wondering if you could provide some guidance in relation to the following issue
In Q3 part b,I am not very clear about the following calculation
18,000 ankle supports to Division B at a contribution of
($15 x 70%) – $7 = $3.5 per unitwe have here 10,000 units produced at spare capacity so contribution ($15 x 70%) – $7 = $3.5 per unit seems correct but for the reminder of 8,000?
what about opportunity costs, ie not getting contribution from sale of 8000 of wrist supporters
“A” charges 30%less market price minimum but then it should add extra for lost contribution ?
Would it not be the rule that selling division always needs to include any lost contribution to avoid loses for the group?
Thank you
I think the point here is to work out what is better for the group, not to decide on a transfer price.
Looking at the ACCA answer, if B buys locally, A can sell 60,000 wrist supports and the after ax benefit to A is 180,000
If B buys from A, then A can sell 18,000 ankle supports to B, but only 52,000 (ie 60,000 – 8,000) wrist supports outside the group. The after tax benefit to A is then 193,800 and this takes the lost contribution into account.
Div A is therrefore anxious to sell to B
Similar calculations are done for the profits made, after tax in B.
For the group the better solution (partly dependign on tax rates) is for B to buy locally and they should be instructed to do so.
Overall the group wants the best outcome and that is decided by looking at the results in
I haven’t realized that lost contribution would have been included in after tax benefit to A of EUR 193,800
but your suggestion makes sense as lower sales means lower tax and so higher tax benefit for A
adding lost contribution would inflate both A’s sales and B’s costs of sales
Thank you for looking into it
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