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I saw all the vedios of transfer prising and in was unable to under stand the numericals of this qn
i wanted to know what is the meaning of unsatisfied demand why they have added the variable element to the unsatisfied external demand ie 5,340,000+884,000
it shoulld vc + opporunity cost right forthe other doubt is whether 5340000 is the marginal cost of production i am asking after seeing all other answers u have given
please explain the meaning of unsatisfied demand and whether 884000 is the opportunity cost or variable cost since transfer price = mc + opp costThe question says that C currently satisfies 60% of the external demand. Since currently they sell 8,010 externally, this is only 60% of what they could be selling. Therefore the could sell another 40/60 x 8,010 = 5,340 externally – at the moment they are not doing this and therefore the demand is not being satisfied for those 5,340.
If they choose to sell these 5,340 to the gearbox division instead of externally then they need to charge at least 5,340 – this is the marginal cost plus the lost contribution (the contribution is the selling price less the marginal cost).
There remaining 2,210,000 cannot be sold externally and so can be sold to the other division just as marginal cost (if they cannot be sold externally then there is no lost contribution) and the marginal cost of these is 40% x 2,210,000 = 884,000
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