Division L and Division M. Both divisions make a single standardised product. Division L makes component L, which is supplied to both Division M and external customers. Division M makes product M using one unit of component L and other materials. It then sells the completed product M to external customers. To date, Division M has always bought from division.
the following r divison wsie details:
division l
sp-40 vc-20 seling costs-4 total fc-500k , external demand-160k full capacity-300k
division m
sp-96 contributon-26 total f-200k demand -120k, capacity 130k
Division L charges the same price for component L to both Division M and external customers. However, it does not incur the selling and distribution costs when transferring internally. Division M has just been approached by a new supplier who has offered to supply it with component L for $37 per unit. Prior to this offer, the cheapest price which Division M could have bought component L for from outside the group was $42 per unit.
qtn-Discuss the problems which will arise if the transfer price remains unchanged and advise the divisions on a suitable alternative transfer price for component L
for writing the method too choose , i wrote that it could opt full cost pricing so the transfer price will be 21.67 nd his way both the divisions will be satisfied. kaplan said it should charge 36 or 37
can i say use full cost method or is it wrong?