March/june 2016 question 4

2nd

Let us assume M buys from internally

Selling price—96
cost———(40)
Variable cost-(30)
equal profit-26

Let us assume division L sells externally and internally
External sales-40
internal sales-20
less variable cost-(24)
equal profit-56

Group
Selling -136
less variable cost by M-30
variable cost by l—24
equal profit 82

now 56+26=82

I think i made a wrong by subtracting interdivisional cost of 40 $

when i deduct Division M’s profit in first and second case

29$-26$=3$ we can see that division M earned extra 3$ by buying from external supplier.
But when i deduct group profit i both cases i can not get incremental loss 42-45 it will be 37 $

1st

Let us assume Division M buys from outside supplier.

———-Selling price——–96$
Less Supplier cost———(37$)
less own cost—————(30$)
equal profit ————–29$

2nd

Let us assume M buys from internally

Selling price—96
cost———(40)
Variable cost-(30)
equal profit-26

M earns extra profit if buyr from outside supplier which is 29$-26$=3$

1st
Group profit

Selling(40+96)=136
less supplier cost-(37)
cost by M–(30)
cost by l—–(24)
equal profit—–45

2nd

Group profit
Selling -136
less variable cost by M-30
variable cost by l—24
equal profit 82

82-45=37$
In your video lecture, company losses 17 $ per component, then I deduct it group profit from each other, why I can’t get 17$ loss?

Hope it is clear now