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Hello Sir,
Question 18 of revision mock please
X Y
external sp 80 100
variable c. 60 70
contributn per unit 20 30
labour hrs/unit 5 10the company has limited labour hours available, and another division requires product Y.
what is the minimum transfer price that should be charged by the division to achieve goal congruence?I don’t know how to obtain the answer of $110
Thank you
If the other division did not exist, then this division would choose between selling X and Y on the basis of the contribution per hour (key factor analysis – the labour is limited).
X generates $4 per hour; Y generates $4 per hour. So they would use all the hours making X and would earn $4 per hour.
The other division wants Y. To make it worthwhile the TP must be at least the marginal cost (70) plus the lost contribution. Every hour used is taking hours away from product X and is losing them $4. Each Y takes 10 hours, so the lost contribution is $40.
So the minimum TP is 70 + 40 = $110
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