Transfer Price – Unit Price

Hi John,

I have come across this question:

TM Plc makes components which it sells internally to its subsidiary RM Ltd, as well as to its own external market.

The external market price is $24 per unit, which yields contribution of 40% of sales. For external sales, variable costs include $1.50 per unit for distribution costs, which are not incurred on internal sales.

TM Plc has sufficient capacity to meet all of the internal and external sales. The objective is to maximise group profit.

At what unit price should the component be transferred to RM Ltd?

I calculated the MC would be $14.40 + $1.50 = $12.90 …. this is the answer. However I went further and got it wrong, i added on the lost contribution of $9.60 if they don’t sell externally.
The answer doesn’t explain why this case is different? Would you be able to help me please?

Thanks again for your help.