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——————————————————Gearbox division————-Cco
External sales—————————————–25535——————-8010
internal sales to Gearbox——————————————————7550Cco currently satisfies 60% of the external demand for its components.?ts variable cost represent 40%of revenue
?f it has external sales of 8010$, then it has remaining sales 5340 (8010*100/60=13550-8010=5340).How the company can have 7550$ internal sales out of 5340$?Also, how the company spare capacity of 2210 $?(7550-5340)
Could you explain it please?
C Co is satisfying 60% of the external demand and therefore the external demand is 13,550. They could therefore sell an additional 5,340 externally. But this would mean they would have to sell less to the other division (because they are working to full capacity and so cannot produce more). At the moment they are selling 7,550 to the other division. If they sold an extra 5,340 externally, then they would only be able to sell 2,210 to the other division.
You want to say that Since Cco has limited production capacity, which the unit has not been showed in this example how many units made to external customers and how many to internal division,the internal sales have been taken into consideration in the following way
Marginal cost+lost contribution
———-2210+5340=7550Did i get it right?
No you did not get it right!
Check carefully the second and third paragraphs of the examiners answer.
2,210 is not the marginal cost – it is the selling price!!
Yes 2210 is selling price which is now understandable but what is then remaining sales of 5340$ considered here? I am really confused here. this is the extraordinary transfer pricing example ever confronted which how many days think of understanding it in-depth.Can not still catch it.
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