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Dear John,
I just want to clarify and hopefully you can solve my doubt.
If division A make component which can be sold to external market and transfer internally to Division B
Q1.If the contribution earned from selling externally is HIGHER than incremental cost(external price- marginal cost) , then the division A should sell externally and remaining transfer internally. Is this correct?
Q2. If the incremental cost is higher than the contribution earned from selling externally, then should transfer internally and remaining sell externally. Is this correct?
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in Q1, division A can include the HIGHER contribution and its marginal cost and can sell internally if there’s a policy that both division must do internal transfer due to goal congruence.
fiza.aijaz:
Please do not answer questions in this forum because it is the Ask the Tutor Forum and you are not the tutor. (But please do help people in the other Paper PM forum 🙂 )
Lucas.acca:
Q1 It depends on what the constraints on A’s production are. The minimum transfer price is always the marginal cost plus any lost contribution for A. The maximum transfer price is the net marginal revenue to B. They determine whether there is an agreeable transfer price and therefore how the products should be sold.
Q2 The same rule as above applies.
Have you watched my free lectures on all of this?
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sorry sir i realized instantly and wanted to delete my reply but couldn’t, will not happen again.
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