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Hi John,
The first question asks whether further processing of L,M,S should be doe by DIv B so that it is profitable for the company as a whole.
For Div B, SX is loss making but for the company as a whole all products are profit making right as we do not consider the transfer price of Div A while calculating company profits. Pls explain.
Many thanks!!All of the products could be sold to the external market without further processing, and that would be profitable.
As far as the company is concerned, it will only be worthwhile transferring to division B and doing further processing it they will make extra profit.
They will only make extra profit if the extra revenue they will earn is more than the extra costs they will incur.
In the case of L and M, then extra revenue is more than the extra cost – so extra profit.
In the case of S this is not the case – so it would mean less profit.As I explain in my free lectures (and I assume that you have watched them), the transfer price is of no relevance at all to the overall profit of the company.
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