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Hi John,
When looking at part c of advising on a suitable transfer price. Since division L will have unused capacity as stated in the answer if div M buys externally, would it not be correct to suggest the transfer price be between $20 – $37? Normally when there is spare capacity the vc is taken and then compared with the external price if it is lower than the internal price.
Thank you for your help.
Sorry – I must have somehow missed your question 🙁
From the groups point of view, yes – the transfer price must be between 20 and 37.
However, from L’s own point of view, reducing the transfer price will reduce their profits. The are going to have to accept some reduction (otherwise they will lose their sales to M) but they will want to keep the reduction to a minimum and therefore charge M as much as they can expect M to be prepared to pay.
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