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Hi Dear tutor, I have a question.If question says say for instance Division has capacity 300000 units and production unit is 300000 what is difference between them?
In the first case, I only take how many units division produce and in the second case i take the whole 300000 units?
march/june 2016 question number 4.Division L has capacity only 300000 and external demand is 160000 and Division L needs 120000 why we take only 280000 units for production cost not the whole 300000 units?
The capacity is the number they are capable of producing. The production is the number they actually do produce (which obviously cannot be more than the capacity).
A company will only produce what they are capable of selling. In the question you refer to, if they can sell 160,000 externally and can sell 120,000 to the other division, then they can sell 280,000 in total and so will produce 280,000. OK, they are capable of producing 300,000, but there is no point in producing that many because they would end up with 20,000 that they cannot sell!!
Have you watched my lectures, because I explain what is meant by capacity in my free lectures on transfer pricing?
I have watched all of your lectures and it is really helpful.Now I understood now I got it.
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