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Hey John
A) What if the competitive price in the market is £20 and the marginal cost + lost contribution is 25? Where marginal cost in this case is 15.
B) What if the competitive price in the market is £20 and the marginal cost is 25?
In both these cases, what would be the minimum and maximum transfer price?
Thanks for your help and wish me luck for the exam tomorrow. Hope I do you proud
I assume that by ‘competitive price’ you are meaning the price that the division doing the transferring can sell it for externally? (There is no other relevance to ‘competitive price’)
If so, then (A) is simply not possible!
The lost contribution (assuming limited production capacity) is 20 – 15 = 5.
Therefore the minimum transfer price is 15 + 5 = 20 (marginal cost plus lost contribution).For (B) the minimum transfer price is simply $25. (They would not sell externally because it would make a loss, and so there is no lost contribution and the transfer price is the marginal cost).
There is not enough information to say the maximum transfer price. It is always the lower of the net marginal revenue of the receiving division, and any external purchase price.
All the best for tomorrow – I hope it goes well 🙂
By competitive price I mean the price at which the buying division can buy externally.
So the market price for the component being transferred.Thanks for the help
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