It is Y they are transferring and Y takes 10 hours per unit. Every hour taken for Y takes 1 hour away from production of X and that loses them $4 per hour.

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 ?

Hi John,
Thanks for your lectures
I study for retaking F5 paper as I didn’t know your lectures last time.
Your lectures help me understand well
Thanks.

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!!!

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).

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.

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.

But they wouldn’t be selling Y externally. If they were not selling to the other division they would make X and sell that externally because it would give a higher contribution.

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…

JojoBeat says

Hey Sir,

If they told labour hours are unlimited but demand is limited, how should we approach the question?

John Moffat says

That is dealt with in the earlier examples in this chapter.

sal.st49 says

Hi John,

I understand that we have lost $4 contribution of X but why did we multiply with the 10 hrs of Y?

John Moffat says

It is Y they are transferring and Y takes 10 hours per unit. Every hour taken for Y takes 1 hour away from production of X and that loses them $4 per hour.

ty0311 says

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!!

John Moffat says

Strictly it should be > $110, but it really doesn’t matter for the exam.

YK2017 says

Hi John,

Thanks for your lectures

I study for retaking F5 paper as I didn’t know your lectures last time.

Your lectures help me understand well

Thanks.

John Moffat says

Thank you for your comment 🙂

amna002 says

heyy

how is the marginal cost 70 in the minimum T.p??

John Moffat says

It is given in the question that the variable. cost per unit of Y is $70.

cadhakan says

Why we have to use x 4$contribution per hr rather than y 3$ contribution per hr??

John Moffat says

Because making Y is taking hours that would have been used to make X, so we are losing $4 contribution per hour.

lilygao says

Thank you! John

Your explanation is so clear!

John Moffat says

Thank you for your comment 🙂

accablessing0110 says

Hi!

Mr. John

Thanks for the quick response

accablessing0110 says

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!

John Moffat says

You need to buy a Revision Kit from one of the ACCA approved publishers. They are full of past exam questions and other exam-standard questions.

accablessing0110 says

Hi,

John

Thanks for the quick response

garvit says

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.

Shivangi says

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).

taofeeq11 says

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?

cyen says

Hi John,

Can I say that we always add lost of contribution if there is a limited production capacity?

John Moffat says

Yes (assuming of course that there is lost contribution because they would otherwise be selling goods elsewhere 🙂 )

cyen says

Thank you John!

israabbas says

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.

John Moffat says

$30 is the contribution per unit from product Y (the selling price of 100 less the variable cost of 70),

israabbas says

am very shamed to ask such silly question forgive me perhaps I was hungry 🙂

John Moffat says

Don’t be ashamed (and I hope you are less hungry now) 🙂

John Moffat says

But they wouldn’t be selling Y externally. If they were not selling to the other division they would make X and sell that externally because it would give a higher contribution.

leobenny says

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

ahmedakande019 says

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

John Moffat says

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.