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Lost contribution is where the selling division has limited production capacity but do we always calculate lost contribution as (external selling price – variable cost). Is this a fixed rule?
If the selling division has limited capacity to fulfill either the demand from both external and from division B then we sell to which division first?
Was your second post wanting to make me reply sooner? We state that we try to reply within 24 hours and I always do, so there is no point in pushing me to reply sooner – we do not sit at the computer 24 hours a day!!!
Almost always the lost contribution will be the external selling price less the marginal/variable cost. However there just possibly could be a ‘trick’ as I explain in my lecture working through the last example on transfer pricing in the lecture notes.
There is only one division! It the other division is prepared to pay at least the minimum price set by the transferring division, then they will sell to the other division. If the other division is not prepared to pay that much then they will sell externally. It is whatever is more profitable for the transferring division (and if using ‘sensible’ transfer pricing then the decision will be goal congruent for the company as a whole.
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