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Hi John!
I do have watched your lectures to TP but have some issues concerning example 5.
-Why would the minimum transfer price would be $15 and not $20?
-I know from your explanations that for the moment it has unlimited capacity and therefore can produce as many as it want.
But if there is an external market where the product can be sold for $20, why would division A would not be willing to sell at $20 to div B?-Can div A ignore the fact that it has unlimited capacity and thus sell the product based on the price of external market?
Of course they will be willing to see for $20 – they will charge B as much as they can.
But if B could only afford to pay (say) $18 then they would be silly not to let them have it for $18 because it would still make a profit for them since it only costs them $15. They could not sell them externally for $20 because there is limited demand externally and they are already selling as many externally as they can.
$15 is not the transfer price – it is the minimum transfer price.
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