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Hi
Suppose division A sells externally and makes contribution of 40% on sales. transferring the product to division B will save (say) 1.5. am i right to say the minimum internal transfer price is the variable cost of A(In this case 60% of sales) less the saved cost? ( please be aware that there is no mention of the cost that B will incur).secondly, if we are producing two products. each with it’s specific OH apportionment(different figures) . isn’t it worthwhile to deduct this cost from the forgone contribution? because if we are producing a product at the expense of the other, are we not saving the apportioned OH that otherwise would have been SPECIFICALLY spent if the product is produced?
THANKS,JOHN.
In the first case, the transfer price will be the marginal cost + the lost contribution – the saving.
The marginal cost + the lost contribution is equal to the external selling price, and so the transfer price is equal to the external selling price less the saving to be made by transferring internally.
(This is, of course, assuming that there is limited production capacity and so internal transfers do mean lost external sales).In the second case, apportioned overheads would be ignored completely because the transfer price is based on the marginal cost plus any lost contribution. The marginal cost (and therefore also the contribution) does not include apportioned overheads, only the variable costs.
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