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November 20, 2020 at 6:40 pm
heyy how is the marginal cost 70 in the minimum T.p??
John Moffat says
November 21, 2020 at 9:30 am
It is given in the question that the variable. cost per unit of Y is $70.
November 15, 2020 at 10:03 am
Why we have to use x 4$contribution per hr rather than y 3$ contribution per hr??
November 21, 2020 at 9:31 am
Because making Y is taking hours that would have been used to make X, so we are losing $4 contribution per hour.
November 12, 2020 at 12:05 am
Thank you! John Your explanation is so clear!
November 12, 2020 at 9:08 am
Thank you for your comment 🙂
April 13, 2020 at 7:52 am
Hi! Mr. John
Thanks for the quick response
April 12, 2020 at 11:16 pm
Hi John, I find your videos and approach very useful okay
I now feel like solving more and more past questions on transfer pricing so I can get used to how these questions come, is there any way one could have past questions on this topic lined up? For ease , please!!!
April 13, 2020 at 7:37 am
You need to buy a Revision Kit from one of the ACCA approved publishers. They are full of past exam questions and other exam-standard questions.
April 13, 2020 at 7:53 am
January 3, 2020 at 10:54 am
Thanks for your lecture sir I am bit confused as I thought the lost contribution will be 4-3=1. So the transfer prices will be 70+ 1*10(hr)= 80 . Since I think that by producing y , they would be earning at least 3$ per hour instead of $4. So lost contribution is $1 per hour.
February 9, 2020 at 8:05 pm
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).
November 21, 2019 at 1:30 am
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?
July 29, 2019 at 2:49 pm
Can I say that we always add lost of contribution if there is a limited production capacity?
July 29, 2019 at 5:19 pm
Yes (assuming of course that there is lost contribution because they would otherwise be selling goods elsewhere 🙂 )
July 30, 2019 at 1:28 am
Thank you John!
July 10, 2019 at 5:31 pm
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.
July 10, 2019 at 6:58 pm
$30 is the contribution per unit from product Y (the selling price of 100 less the variable cost of 70),
July 16, 2019 at 1:50 pm
am very shamed to ask such silly question forgive me perhaps I was hungry 🙂
July 16, 2019 at 2:49 pm
Don’t be ashamed (and I hope you are less hungry now) 🙂
November 11, 2018 at 7:43 pm
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.
November 11, 2018 at 3:55 pm
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
August 19, 2019 at 1:47 pm
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?
August 19, 2019 at 3:12 pm
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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