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hi john
i have a few questions-
For transfer pricing, why is that a market based transfer pricie acts as a disincentive to use spare capacity of the company?
also, in your lecture example for the overfraft which amounts to 20000, an overdraft is – a deficit in a bank account caused by drawing more money than the account holds. So it should be relevant as if it were not the order i would have not had to have an overdraftl
It is worth using spare capacity to produce more provided we get more than the marginal cost. Transferring at market price may be too expensive for the other division to buy and so they would not buy and we will not be using the spare capacity.
The 20,000 is only borrowed for the duration of the project, and then it will be repaid. The only extra cost involved is the interest on the overdraft.
also for the question of rooks-
we lose contribution of 15000, incur fixed costs of 18000 and save 5000, so wont it be a loss of 2000.???
Please start a new topic in future when it is a different question.
We are currently already incurring fixed costs of 18,000 as part of our overall fixed costs. If we stop making Rooks then we will save the 5,000 direct fixed costs but all the other fixed costs will stay as they are at present.
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