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Transfer Pricing part 3 – Capacity limitations – ACCA Performance Management (PM)

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  1. Hi,

    So I was confused by the answer in the video.

    But based on the previous lecture- the minimum price is marginal cost + lost contribution. 70 + 40 ( because for every hour we make Y they lose contribution of two units of X, so 20 * 2)

    Is this a correct way to solve?

  2. Hi John,

    I am a little curious, why would the minimum transfer price not be 70 (marginal cost) + 1 (loss in contribution per hour, 4-3) * 10 (hours of producing Y) + 20 (lost contribution of selling instead of externally) = 100?

    Many thanks!

  5. Hi Sir,

    With reference to Example 8, should the answer be written as minimum transfer price = $110 or minimum transfer price > $110?
    I just wanted to clarify the correct symbol ( = or > ) to use in the exam. If it is ” = “, then does this mean that, in theory, the transferring division earns the same amount of contribution by selling externally or internally to another division, but would prefer the latter because it would achieve goal congruence ?

    Many Thanks in advance!!

  11. Hi John,
    I find your videos and approach very useful okay

    I now feel like solving more and more past questions on transfer pricing so I can get used to how these questions come, is there any way one could have past questions on this topic lined up? For ease , please!!!

    Thank you!

  12. Thanks for your lecture sir
    I am bit confused as I thought the lost contribution will be 4-3=1. So the transfer prices will be 70+ 1*10(hr)= 80 . Since I think that by producing y , they would be earning at least 3$ per hour instead of $4. So lost contribution is $1 per hour.

    • They wouldn’t be producing Y at all if Division B didn’t exist. (Since at an external selling price of 100, Y makes less contribution than X.) So, the lost contribution would then be the amount that X would have made in that time (to make one unit of Y).

      Also, why would they sell Y to Division B at an even lower price than that (80 from your question) where the contribution per hour for Y would be only $1 (far less profitable than selling externally, which Division A already doesn’t care to do as X is a more profitable product).

  13. Dear sir,

    Thank you for your lectures! May God bless you.

    I attempted example 8 before watching the lecture as advised. I arrived at $110. However, my rationale was different as follows:

    Division A will only be motivated to transfer product Y to division B, if B pays at least $100 (the external price, so there is no loss of contribution to A, in view of the limited capacity and unlimited external demand). In addition, every time A produces and sells product Y at $100, there is a loss of $10 contribution ( the10 hours required to produce one Y will produce 2 Xs, will gives $40 contribution instead of $30)

    Hence Minimum transfer price > marginal cost + loss contribution due to external price + loss contribution for producing Y instead of X i.e. 70+ 30+ 10.

    Did I arrive at the $110 by coincidence?

  15. Hi, Ms. Jhone that was very informative I didn’t need to read it even thank you. I just wanted to ask you a very tiny thing?

    if $70 was the marginal cost for Y then what is the $30 given in the example represents.
    am saying this because you deduct the 70 from 110 and the result was the contribution cost.

  17. Sir
    Minimum transfer price that should be charged should be 140 ?
    I mean Y is selling the product externally for 100…
    70 the mariginal cost and 30 the contribution
    So if division A is selling Y to division B
    They should get
    70 the marginal cost + 30 lost contribution by selling externally + (10*4=40) contribution lost by not selling X … so the total should have been 70+30+40 = 140 isn’t it?
    I’m little confused here
    Please do help sir

    • yes, because profit has to be made on producing Y, the contribution(less and cost saving) should be added to the marginal cost with the lost contribution of 40, in total Minimum tranfer price A should charge for producing Y should be 100(variable cost plus) and 40(lost contribution on X) in total 140…

      Please sir could you clarify?

      Thanks

      • The variable cost of producing Y is not $100. If you look at the question in the free course notes, then variable cost is $70.

        So the transfer price for Y is 70 plus the lost contribution on X of 40, and so is $110.

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