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Hi, I watched the video explaining the answer to question 8. what i couldn’t understand is why when we work out the minimum transfer price, it is not the marginal cost plus the loss contribution per unit (which would be 70 plus 20 = 90).
instead the answer is 70 plus 40 = 110. in prior examples, where there is limited capacity, the loss contribution of one unit was added to the transfer price. But not in example 8.
is anyone able to explain this to me, because perhaps i think i misunderstood what was explained in the video.
In Example 8, the minimum transfer price is calculated as the marginal cost plus any lost contribution. In this case, the marginal cost is $70, and the lost contribution is determined by the opportunity cost of not selling externally.
To make transfers of Y worthwhile, A need to charge at least 70 + (10 × 4) = $110 p.u.
The lost contribution reflects the opportunity cost of not selling the product externallyHopefully that explains it :0-)
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