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A division is capable of making two product – X and Y.
They can sell both products externally as follows:
X Y
External selling price 80 100
Variable cost 60 70
Contribution 20 30
Labour hours 5hours 10hours
The company has limited labour hours available, and another division requires product Y.
What is the minimum transfer price that should be charged by the division in oder to achieve goal congruence?If the other division did not exist, then they would prefer to make X because X gives a contribution of $4 per hour whereas Y gives a contribution of only $3 per hour.
If they do make Y for the other division then the minimum transfer price is the marginal cost of 70, plus the lost contribution. Each unit of Y takes 10 hours that could have been earning a contribution of $4 per hour.
Therefore the minimum transfer price is 70 + (10 x 4) = $110.
I do suggest that you watch our free lectures. I work through an identical example to this in the lectures on transfer pricing.
By dividing the contribution per unit of $20 by the hours per unit of 5.
Each widget should take 0.5 hours to make. The standard rate of pay is $10 per hour. Idle time is expected to be 5% of hours paid.
They actually produce 10,800 units. They pay $50,000 for 6,000 hours, of which 330 hours are idle.
What is the labour efficiency variance?You have obviously not watched my free lecture on advanced idle time variances.
Our lectures are a complete course for Paper F5 and cover everything needed to be able to pass the exam well.The actual hours worked = 6,000 – 330 = 5,670 hours
The standard hours for the actual production = 10,800 x 0.5 hours = 5,400 hours
Therefore they take 270 hours more than they should have.
This is costed at the standard rate per working hour. Since only 95% of standard hours paid are worked, the rate per working hour is $10/0.95 = $10.5263
So the efficiency variance = 270 x $10.5263 = $2,842 (adverse)Can you explain more about the rate per working hour? I think it should be $10 x 0.95 = $9.5 ???
Sorry, but you think wrong!!
They pay $10 per hour, but only get 0.95 hours of work.
Therefore the cost per hour of work is 10/0.95For more explanation you should watch the free lectures – you cannot expect me to type out the lectures here. We put in a lot of time and effort producing a completely free course covering everything needed to pass the exam.
why did we use the contribution for X and yet the question is asking for the transfer price for Y
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