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Hi sir,
I just wanted to ask for question B
I get confuse why is it the material cost calculation for divison A was multiple by 265 and 200?Thank you
Division A needs both the “other materials from external suppliers” which cost $200, plus “fittings” which they either get externally or they get from Division B.
For part (b) of the question they will be paying $65 for the “fittings” whether they buy them externally or from B.
So….for 60,000 they will buy externally and so the total cost is $265. For the other 20,000 they will buy the “other materials” externally and so the cost is $200; and they will buy the “fittings” from B and the cost is $65 (and this is shown separately in the profit statements as “inter-divisional transfers).
Thank you ! I get it now sir?
How about in term of market value transfer price Sir? I just want to know why is it spare capacity disincentive to be use up and preffered to be in idle state if there’s spare capicity?
I am not sure that I understand your question.
Have you watched my free lectures on transfer pricing?
Yes i did..but i just don’t understand what does it mean if transfer price is at market value,under some circumstances,act as a disincentive to use up any spare capacity in the divisions.
It’s under disadvantages of market value transfer pricesIt is possible that if the receiving division had to pay market value, then it might not be profitable for them to pay that price and so they would not buy.
If the transferring division has spare capacity (that they cannot sell externally) then they should be prepared to sell to the other division at anything more than the marginal cost.
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