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man co (mar/jun 16 amended)
For part c) of this question, what will be the net marginal revenue. Will the transfer price be deducted from the selling price when calculating the net marginal revenue and if not why
Also when calculating the marginal cost for the minimum transfer price will the selling and distribution cost be included or excluded from the marginal cost. If it is excluded then why.
By definition, the net marginal revenue of division M is the selling price less any costs in division M.
The maximum transfer price that M is prepared to pay is then the lower of the net marginal revenue and any external purchase price. I explain the reason for this in my free lectures on transfer pricing.
The minimum transfer price is the marginal cost of division L plus any lost contribution from not being able to sell externally if their is limited production capacity. The marginal cost is only ever the variable costs in the division, by definition. The lost contribution would take account of the distribution costs.
For this question, is the net marginal revenue 26 or is it 66
Also is the marginal cost 24 or is it 20 for the minimum transfer price
Division M’s own costs are 17 + 9 + 3 + 1 = $30.
Therefore the net marginal revenue is 96 – 30 = $66
Division L’s marginal cost is $20 (but obviously this would not be the minimum transfer price because of the lost contribution from external sales of $16).
Have you watched my free lectures on transfer pricing?
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