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hi john, for the lectures for transfer pricing-
A is capable of making two products, X and Y.
A can sell both products externally as follows:
X Y
External selling price 80 100
Variable costs 60 70
Contribution p.u. 20 30
A has limited labour available.
The labour hours required for each product are
X: 5 hours p.u., Y: 10 hours p.u.
A has unlimited external demand for both products.
Division B requires product Y from Division A.
Calculate the minimum transfer price that should be charged by A for supply of Product Y to Division B.Suppose if Division B had required Product X, would the minimum transfer price be (60 plus (5hours*3=15) and so 75????
No.
If A was not supplying to B then they would want to sell X externally and would make a contribution of $4 per hour.
If they were to supply X to B then they would be losing the contribution of $4 that they could have made.
Therefore the minimum transfer price would be 60 + (5hours x $4) = $80.
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