Hi, please can you explain why the minimum TP has a lost contribution of 10 hours? It takes 5 hours to make product X, and 10 hours for product Y, so I would have assumed that the lost contribution is 5 hours at $4 an hour. Thanks 🙂

If they made X they would have been earning $4 per every hour.

If they make Y instead then they are using 10 hours for every unit, and are losing $4 for every hour that they could have been earning by using those hours to make X’s.

Sir I just sat recent f5 paper. It was asked to provide the minimum transfer price when division can sell all units to other division without any external demand limitation. I knew the rule to apply full cost in this situation but due to panic I just went for marginal variable cost. Later I did include fixed cost but it made the price very huge to charge for and other division could get product from less than that externally too. I was stressed out n despite knowing the rule I again went for marginal variable cost. Question was worth seven marks is there any chance of being awarded credit..if u could resolve my query I would be very thankful sir. And u are doing great job

They will not lose contribution from Y because if the did not transfer to the other division they would not produce any Y – they would produce X and earn $4 per hour. So it is the $4 per hour that they will lose if they do produce Y for the other division.

But we are not selling Y – we are transferring it to the other division and so we have to make sure that the transfer price gives us the $4 per hour that we could have got from selling X.

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loukasierides says

thank you for a great example!

John Moffat says

You are welcome 🙂

manishatai says

Hi, please can you explain why the minimum TP has a lost contribution of 10 hours? It takes 5 hours to make product X, and 10 hours for product Y, so I would have assumed that the lost contribution is 5 hours at $4 an hour. Thanks 🙂

John Moffat says

If they made X they would have been earning $4 per every hour.

If they make Y instead then they are using 10 hours for every unit, and are losing $4 for every hour that they could have been earning by using those hours to make X’s.

shanif007 says

dear sir why did we take the hours of product y? which is 10 because we lose the contribution of X $4 and product X hour is 5

John Moffat says

Because we want the transfer price for Y. Y takes 10 hours, and every hour taken from production of X is losing contribution of $4.

deepapoudelkandel says

Great lecture thank you sir

John Moffat says

Thank you for your comment 🙂

vinxi says

Sir I just sat recent f5 paper. It was asked to provide the minimum transfer price when division can sell all units to other division without any external demand limitation. I knew the rule to apply full cost in this situation but due to panic I just went for marginal variable cost. Later I did include fixed cost but it made the price very huge to charge for and other division could get product from less than that externally too. I was stressed out n despite knowing the rule I again went for marginal variable cost. Question was worth seven marks is there any chance of being awarded credit..if u could resolve my query I would be very thankful sir. And u are doing great job

John Moffat says

In future please ask this kind of thing in the Ask the Tutor Forum, and not as a comment on a lecture.

You will certainly get credit for the bits you did correctly – the marks are for the workings and not for the final answer 🙂

Damian says

How did you get the Marginal Cost of $70 for Y. I think i have missed some details from the scenario. Thank you

John Moffat says

It is given in the question – have you not printed out the free lecture notes (as instructed at the start of each lecture)?

aliza24 says

should not we also consider the lost of contribution of $30 from product y?

I got confused. Please help me with it. Thankyou!

John Moffat says

They will not lose contribution from Y because if the did not transfer to the other division they would not produce any Y – they would produce X and earn $4 per hour. So it is the $4 per hour that they will lose if they do produce Y for the other division.

krupali289 says

Hello Sir,

Sorry I’m not able to find the section C as you said in this lecture to do so.

Where is it again ?

Thanks

Krupali

usthani says

Sir why is the lost contribution $4? If we produce Y we do get a contribution of $3 per hour so isn’t the actual loss of contribution $1 per hour?

John Moffat says

But we are not selling Y – we are transferring it to the other division and so we have to make sure that the transfer price gives us the $4 per hour that we could have got from selling X.