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Please explain the solution to example 6, of Chapter 13, in open tuition notes.
Why 22?And also example 8, why 110? But in that case it’s cheaper for division B to purchase externally for 100, no?
Thanks in advance.
The transfer price should be 20 – 25. No ideas where the $22 came from – presumed an error.
Has to be at least 20 to encourage internal supply to B ie has to compete with the infinite outside demand for the intermediate product. Has to be no greater than 25 to allow B to make a contribrion (or to avoid making a loss).
Thanks.
And also example 8, why 110? But in that case it’s cheaper for division B to purchase Externally for $100, no?
Div A can make X or Y. There is no limit on sales states, but there is a limit on production (hours are restricted).
If no transfers to Div B, A would only make X (higher contribution/hour).
To be worthwhile A transferring to product Y to B, it has to be compensated for the cost of $70 plus the 10 hours worth of lost contribution 10 x $4. Total compenstaion needed is therefore 70 + 40 = 110.
For a transefer to take place, both parties have to play and Div A will not supply product Y to B for less than 110. There is no indication that product Y is currently available from any other source. If Div A is the only supplier of porduct Y, Div B will have to pay $110 or it will not receive any goods.
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