Jb Ltd is a divisionalised organisation comprising a number of divisions, including divisions A and B. Division A makes a single product, which it sells on the externa market at a price of 12 per unit. The variable cost of the product is 8 per unit and the fixed cost is 3 per unit. Market demand for the product considerably exceeds division A's maximum production capacity of 10000 units per month.
Division B would like to obtain 500 units of the product from division A. If division A does transfer some of its production internally rather than sell externally, then the saving in packaging costs would be 1.5 per unit.
What transfer price per unit should division A quote in order to maximise group profit?
I thought the transfer price would be the marginal cost plus lost contribution from not being able to sell externally. So it should be 8 + (12-8+1.5) which is 13.5 but this is incorrect and I don't understand why.
Also why the saving in packaging costs is added to the external market price of 12 in arriving at the answer
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divisionalisation
5y ago#1If the sell externally, then the marginal cost is the cost of producing ($8) plus the cost of packing (($1.50), so a total of $9.50. Therefore the lost contribution through not selling externally is 12 = 9.50 = $2.50.
Therefore the minimum transfer price is 8 + 2.50 = $10.50.
4y ago#2The wording of the question would suggest that the $8 is the cost of producing the unit.
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