ROTECH (JUNE 2014)

I am not clear whether you are asking what the question wanted, or how the examiner did the calculations.
What the question wanted was for you state the sensible range of transfer prices (as we usually do), and to show your workings.

As far as the calculations are concerned, we use the two rules that I explain and state in my lectures (have you actually watched all the lectures??).

Here the question specifically asks for the total transfer price (not the price per unit) but that creates no difficulty – it actually makes it easier.

The maximum transfer price is determined by Gearbox division, and is the lower of the net marginal revenue and any external price. Given they can buy at 5% less than what they currently pay, this is easy.

The minimum transfer price is determined by the Design division and is the marginal cost plus any lost contribution.

Given that C currently satisfies 60% of external demand, they could sell another 40% externally which is 40/60 x 8,010 = 5,340. The variable cost of these is 40% x 5340 = 2136.
Therefore to sell these to Gearbox, they need to charge 2136 + (5340 – 2136) = 5340.
Gearbox is currently buying a total of 7,550 from C. The extra (7,550 – 5340 = 2210) could not be sold externally and so there is no lost contribution. So for these the minimum C should charge is the marginal/variable cost of 40% x 2210 = 884.

Therefore the minimum total they should charge is 5340 + 884 = 6224.

Why? You have a printed answer and I have explained the answer in my previous reply.
What is in the answer and in my reply is all that is needed for this question.

You cannot expect any more from me on this – we do not give private tuition 🙂