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Hello John,
I have watched your lectures on TP, unfortunately however, I am unable to connect the dots in the suggested answer to the above question..I believe u can help with some easy to understand way of approaching it..thank youYou will have to say which bit of the answer you are not understanding. I can’t really write up a full answer (because I would really only be repeating what the examiner has done in her answer 🙂 )
The minimum transfer price is always the marginal cost plus any lost contribution.
Therefore for those transfers that could be sold externally, the minimum price for selling to the other division would be the marginal cost plus the lost contribution (which is the same as the external selling price).
For the extra transfers that could not be sold externally, the minimum price will be the marginal cost (because there is then no lost contribution on these).
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