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Hello sir,
I have confusion in calculating the lost contribution in the question below. Please help me!
Q: perrin co has 2 divisions ,A and B.
Division A has limited skilled labour and is operating at full capacity making product Y. It has been asked to supply a different product X to division B. Division B currently sources this product externally for $700 p.u.
The same grade of materials and labour is used in both products. The cost card is below:(p.u)
Product. Y. X
Selling price. 600. –
Materials($50 perkg). 200. 150
Labour(20 per hour). 80. 120
Fixed overhead. 60. 90
(15 per hour)
Using opportunity cost apprpach to transfer pricing, what is the minimum transfer price?
Solution mentioned to be 750.
The variable cost is 270 and lost contribution is calculated as (600-(200-80)=480
But sir i do not understand why lost contribution is calculated this way. I think it should be 600-200-80.
Thanks in advance!The 480 is correct, but I am puzzled by the way they workings have been shown.
The lost contribution from Y is 600 – (200 + 80) = 320 per unit.
Each unit of Y takes 4 hours (80/20) and so the lost contribution is 320/4 = $80 per hour.Each unit of X takes 6 hours (120/20), and so the lost contribution for each unit of X that is made is 6 x 80 = $480.
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