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Hi Tutor,
Please help me in understanding, what happens when there is unlimited capacity and no external market?
Thank you.
Nothing special happens. If there is no external market, all production has to go from the producing division to the selling division. The transfer price has to be in a range that allows both divisions to make a profit…. or at least not to incur a negative contribution…..so that both parties want to play ball.
Chapter 14 of our notes and lectures gives a full run-down of the issues.
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