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The parts needed to assemble into the components in Yilandwe will be sent from the USA by Imoni Co at a cost of $200 per component unit, from which Imoni Co would currently earn a pre-tax contribution of $40 for each component unit. However, Imoni Co feels that it can negotiate with Yilandwe’s government and increase the transfer price to $280 per component unit.
My question is that I am not sure the definition of a pre-tax contribution and the transfer price.
Thank you for your amazing lecture, I have watched them twice so far.
The transfer price is the price that Imoni is charging for the components. At present they are making a contribution of $40 per unit and so the variable cost to Imoni must be 200 – 40 = $160 per unit.
In future they will charge 280 per unit and so the contribution will be 280 – 160 = 120 per unit.The 280 is a cash outflow from Yilandwe. The net receipt for Imoni is 120 and this will be taxable on Imoni.
Thank you for your clear answer. Speaking of this question, Sales component units are stated in 000s. Is it ok to assume 000s as million?
Thank you very much ~
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