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Hi John,
Part b answer worked out material costs for A as follows:
60,000×265 + 20,000×200 = $19,900I worked it out to be:
60,000×200 + 20,000×65 = $13,300. Is this incorrect and why?Thank you
Your answer is not correct.
We are trying to calculate the material costs paid externally.
Division A will be buying 60,000 units externally, and 20,000 units from Division B.
The units bought externally are being bought for $65, and in addition Division B spends an extra $200 on other materials – $265 a unit in total.
The units that come from Division B are ‘free’ as far as the company is concerned (whatever they pay B as transfer price is cost to A but income to B, so no net effect on the company), but A still has to spend $200 a unit on other materials.
Think I am confusing myself here. I understand the part where the units bought externally cost $65, thereby paying that plus cost of $200 for the 60000 units. Division B’s material cost as mentioned is $5, think I am confused here since they didn’t mention an additional spend of $200 for div b. The additional 20000 units were cost at div A’s cost. Please help me to understand this part.
Division A has to spend on other materials wherever they get the units from.
Division B does have costs as well – the figures above were just the material costs for division A
Hey @John.. Regarding the same question (Dec 2011 Q 2)
How do we come to know whether there is an unlimited demand on market or limited demand?
I am sorry but I am away from home this weekend and I cannot access the question – I will answer early next week when I am home.
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