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External is selling component A at $50.
Division A want to buy.Division B makes component A for $30 and sells for $55. $1 is distribution expense for externals.
Division B has more external demand than limited capacity.What is transfer price to maximise group profit?
Kindly help me I know it is invalid to question without answer but I have lost the key.I assume that you have watched my lectures on transfer pricing, so you tell me what you think that answer is and then I will tell you whether or not you are correct 🙂
(I don’t know whether it is the BPP or Kaplan Kit that you are using, but if you email them they should reissue you with the key.)
I think the answer is that division B should sell to internal first and then to external for profit maximisation.
Organisation will have to buy for $50 and will earn $24 on each unit if sold externally and bought externally. Net loss of $26.
If organisation will first satisfy internal demand so they would have lost contribution of $24 but saved $50.
Am I right?B can sell everything they produce externally and make a contribution of 55 – 30 – 1 = $24 per unit.
It is therefore only worth selling to A if they make a contribution of at least $24, which means a minimum transfer price of $54.
(However A will not buy at that price because they can only sell for $50 and would make a loss).
To maximise group profit the TP should be $54 which will mean B selling all of their production externally.
If B is selling externally so what is need to set transfer price for those units. B should only set $30 for the units he want to sell internally.
Why on earth should they want to sell internally when they can sell all of their limited production externally? On the basis of the question as you have typed it, the profit of the group will be maximised if they sell all of their production externally.
I won’t lie to you. Actually it was an exam question and it contains 10 marks. I said that organisation will sell internally first and gave the same explanation what I said it here. Can you guess if any marks I will get or I will be getting NIL?
I got the same question
it was as following as far i remember
Div A has 450K capacity, external sales has max demand 380K @ 55$ ( vc = 30 and for external sales there is a 1 $ distribution cost )
Div B want parts of 120K unit they find another supplier selling the same parts @ 50$
what is the recommended price to maximise company profit ?
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