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My Dear tutor i have a question.
Question 3 transfer pricing.
It says C CO has always charged the same price to the Gearbox division as it does to its external customers.However, after being offered 5% lower price for similar components from external supplier, the manager of the Gearbox division feels strongly that the transfer price is too high.
My dear tutor, it says the transfer price is charged the same to external customer as it does to Gearbox so why we take 7500*95=7172.5?
if it says the transfer price is charged the same to external customer as it does to Gearbox , so the requirement to take external transfer price 8010*95=7609.5
they show to external figures 7550 under C Co but they say differently such as ”it says the transfer price is charged the same to external customer as it does to Gearbox”
Also,I have one more question.
C co satisfies 60% external demand so overall revenue is 8010/0.6=13350.
After selling as possibel as maximum ti external customers there are still 5340 remaining out of 13350.
Gearbox needs 7550 and external supplier offers 7172.5(7550×0 95),so that C co will sell remaining part (5340) to gearbox but does not fulfill the overall sales requirement which 2210 (7550-5340) should be sold.
My question here is that if C co sell all of its capacity of 13350(5340 to gearbox and 8010 to outisde customers and there are nothing remaining) how we can calculate 2210 by multiplying 0.4 variable cost %.in fact it is not the spare capacity of C co we calculate with varibale cost.
Did not get this part.Gearbox is currently paying $7.550 to C Co..
Gearbox has been offered a 5% lower price, which means they can buy them for 95% of what they currently are paying.
95% x $7,550 = $7172.50.
If they can buy them externally for this price, then it is better to do that unless C reduces the transfer price to at most $7172.50.As far as C is concerned, they are currently selling 8,010 externally, and this is 60% of external demand. So they could sell an extra 40/60 x 8,010 = $5,340 externally. So make it worthwhile selling these to Gearbox they would therefore need to charge $5,340.
Whether they sell externally or to Gearbox, there total they are selling at the moment is 15,560. The total they could sell externally is 8,010 + 5,340 = 13,350 This means that the remaining 15,560 – 13,350 = 2,210 could not be sold externally anyway. So these can be sold to Gearbox at marginal cost (there is no lost contribution). The marginal cost is 40% x 2,210 = 884.initially I found 2210 without multiplying 40% such as deducting 15560-13350 but then I confused in fact its sales is 13350 not 15560 but after your explanation ”Whether they sell externally or to Gearbox, there total they are selling at the moment is 15,560” now it is clear your just one phrase was enough for understanding.
Thankkkkkkkkkkkkk you very muchhhhhhhhhhhhhh!
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