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In June 2015, concerning the question Mobe CO, in the marking scheme, it says:
-“For every motor sold externally, Division M generates a profit of $80 ($850 – $770) for the group as a whole. For every motor which Division S has to buy from outside of the group, there is an incremental cost of $60 per unit ($800 – [$770 – $30])”-Could you explain the logic of this incremental cost of $60.
The cost of motors supplied by division M is $770, but the question says that if they supply to Division S the cost will be $30 lower and so the cost to the group will be only $740.
That is if S is buying motors from M.If on the other hand S buys motors externally, then the cost will be $800.
So the extra (incremental) cost to the group if S buys externally is 800 – 740 = $60.
Following from the above, therefore as long as profit for the group is higher than incremental cost, then it is advisable to buy externally. Is this correct? Thanks for your time.
No. If the extra revenue is more than the extra cost then it is better to buy externally.
Have you watched my free lectures on transfer pricing?
hello john… according to the pov of the division M, if we are talking about the minimum price, it has to be marginal cost + opp cost right? because it has limited production capacity*. please do give me a reply!
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