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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Portable garage company (June 2018)
Hi sir,
In this question I have doubt in part b and c where in part a they calculate contribution division A (15-3-4-1) and incremental cost for division b (13-7) why and how I know to do like this? And in part c I m not able to understand. So can you please explain me. Thanks in advance
Part b is following the normal rules for ‘sensible’ transfer pricing.
A can either sell adaptors to B or sell them externally.
If they sell externally then they make a contribution of 15 – 3 – 4 – 1 = $7 per unit.
It is only worth them selling to B instead provided they charge more than the marginal cost of $7 plus the lost contribution of $7, which means they need to charge B at least $14.
However B can buy externally for $13 and so will prefer to buy externally.
So A will sell as many as they can externally, which is 200,000.
A is capable of producing an additional 150,000 which they can not sell externally (and will therefore not result in lost contribution) and so they can sell these to A at anything in excess of the marginal cost of $7. (So B will buy 150,000 from A).
In Part (c), if B wants 180,000 from A (because there is now no external supplier) then the extra 30,000 would mean losing external sales and so they would have to charge at least $14 per unit for these 30,000.