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Minimum Transfer price

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Minimum Transfer price

  • This topic has 1 reply, 2 voices, and was last updated 4 years ago by John Moffat.
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  • Author
    Posts
  • June 1, 2021 at 10:40 pm #622706
    edwin1294
    Participant
    • Topics: 6
    • Replies: 7
    • ☆

    Hi John, this question is from Mock exam 3 from the BPP kit – question No 5 on transfer pricing. How and why is the answer $750. I know the Minimum TP when in full capacity should be opportunity cost plus variable cost. I didn’t understand the part where Y takes 4 hours and X takes 6 hours. Please can you explain. Thanks very much

    June 2, 2021 at 8:12 am #622730
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    At the moment B is making product Y. Each unit of Y takes 4 hours and therefore they are currently earning a contribution of (600 – 200 – 80) / 4 = $80 per hour.

    If they make product X the they will have the marginal cost of 150 + 120 = 270 per unit. Each unit of product X takes 6 hours and every hour used is taking hours away from production of Y and therefore thy lose contribution of 6 hours x $80 per hour = 480

    So the minimum transfer price is 270 + 480 = $750.

    This is very similar to the last example that I work through in my free lectures on transfer pricing.

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