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Hi ,
Could you kindly explain how to work out the following question?Oxco has 2 divisions, A & B. Div A makes a component for air conditioning which it can only sell to div B. it has no other outlet for sales.
Current information relating to div A is as follows:
Marginal cost per unit £100
Transfer price £165
Total production & sales of the component each year 2200 units
specific fixed costs of div A per year £10 000Cold co has offered to sell the component to div b for £140 per unit.If B accepts the offer, div a will be shut.
If div B accepts Cold co’s offer, what will be the impact on profits per year for the group as a whole ?
Thanks
Surely you have an answer in the same book in which you found the question? In future please ask about whatever it is in the answer that you are not clear about.
If B accepts Cold’s offer then the cost per unit to the company as a whole will be higher by $40 – so in total higher by $88,000.
However, since A will be closed, the company as a whole will save the fixed costs of $10.000.
Therefore the net effect on Oxco’s profits will be that they will fall by $78,000Have you watched my free lectures on transfer pricing? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
Hiya John,
Many thanks for the explanation/answer, of course there is answer in the book but I did not understand a thing from that answer book! or may be the way it is explained,I was comparing transfer pricing £165 and £140.
Yes I did watch your lectures and I guess it is all about practicing more questions & familiarizing your self with the wording!
And apologies for posting on both forums.
Thanks!
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