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In a company with a divisionalised structure, Div A transfers its output to divB. DivA produce just 1 item component X. Div B makes and sell an end product that requires one unit of component X.
Marginal cost of production in div A $8
Fixed overhead cost of production $3
Cost of selling in external market $1
Market price in external market $16
Div B contribution from further processing component X, before deducting transfer cost $25
Div A is working at full capacity.
What is the min price per unit of component X in this situation?
How to find the contribution lost??The selling price in the external market is $16.
The marginal cost of selling in the external market is 8 + 1 = $9.Therefore the lost contribution is 16 – 9 = $7 per unit.
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