Yes, but if M sells externally then the group makes a profit of $80. If S buys externally then the extra cost to the group is $60.

So it is better for M to sell as many as possible externally. That leaves only 30,000 available for S and so the remaining 5,000 will have to be bought externally. These 50,000 will be costing more to the group but that is what will result in the maximum profit.

(Please ask future questions in the Ask the Tutor Forum rather than as a comment on a lecture 馃檪 )

Hi sir, I have a question Required: ‘Assuming that the group鈥檚 current policy could be changed, advise, using suitable calculations, the number of motors that Division M should supply to Division S to maximise group profits. Recommend the transfer price or prices at which these internal sales should occur.’ The requirement wants us to calculate the number of motors that Division M should supply to Division S to MAXIMISE group profit but if Division S buys from an external supplier 5000 units. Then the group will probably suffer an extra 60 dollars in variable costs per unit of motor (800-740). I am correct? Please advise. Thank you

John Moffat says

Yes, but if M sells externally then the group makes a profit of $80. If S buys externally then the extra cost to the group is $60.

So it is better for M to sell as many as possible externally. That leaves only 30,000 available for S and so the remaining 5,000 will have to be bought externally. These 50,000 will be costing more to the group but that is what will result in the maximum profit.

(Please ask future questions in the Ask the Tutor Forum rather than as a comment on a lecture 馃檪 )

HoPhucAn says

Hi sir, I have a question

Required:

‘Assuming that the group鈥檚 current policy could be changed, advise, using suitable calculations, the number of

motors that Division M should supply to Division S to maximise group profits. Recommend the transfer

price or prices at which these internal sales should occur.’

The requirement wants us to calculate the number of motors that Division M should supply to Division S to MAXIMISE group profit but if Division S buys from an external supplier 5000 units. Then the group will probably suffer an extra 60 dollars in variable costs per unit of motor (800-740). I am correct? Please advise. Thank you