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Dear Moffat,
Question on transfer pricing for June 2014 exams.We are told that C co currently satisfies 60% of its external demand.External sales are $8,010,000. I thought the unsatisfied external demand would be 40% of $8,010,000.
Again, on the suggested solution, why should we make the sales at the current price of $5,340,000 when we are told that C co has a limited demand of 60%
Well understood that $8,010,000 is only for external sales of 60%.Therefore for the remaining 40% will be 8,010,000*0.4/0.6=$5,340,000.
Now, why should we assume that $5,340,000 could be sold externally when we are told that C co has a limited demand.
But the question says that they currently only satisfy 60% of the external demand. So the external demand is higher and therefore they would be capable of being able to sell the extra 40%.
“But the question says that they currently only satisfy 60% of the external demand”So this means that C co has unlimited demand ?
No it does not mean that.
C does have limited demand, but at the moment they are only meeting 60% of the demand.
Suppose the total demand was 100. At the moment they can meet 60% i.e. 60 of the demand. So they are be able to sell an extra 40. That is 40/60 of the current amount that they are selling.
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