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I am looking at the model answer for Yilandwe co and I don’t understand how the figures for the contribution(part sales) were obtained.($120+ inflation per unit ) and I am seeing 18,540 for year 1.
In the question
[.. from which Imoni Co would currently earn a pre-tax contribution of $40 for each component unit. However, Imoni Co feels that it can negotiate with Government to increase the transfer price to $280 per component unit.]1.Parts sold from Imoni Co to Yilandwe at a cost of $200, and thus earning $40 contribution. In this sense, cost relates to Yilandwe company, but for Imoni Co it’s a selling price, meaning that the CoS for this uni at Imoni co is $160.
2.If the sales price increases from $200 to $280, but the cost of sales per unit of Imoni Co stays the same at the level of $160, then the contribution is $120.
3.Answer: $120 (contribution per uni) * inflation rate * nr of units = 18,540.Hope this helps.
Mikhail: Thank you for your answer, but please do not answer in this forum because it is Ask the Tutor Forum (but please do help people in the other P4 forum).
teepok: Mikhail is correct 🙂
to: John, thanks, i’m pretty new to this forum, that’s why i ended up in a wrong forum; your comment noted
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Mikhail…very helpful..thank you very much
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John Moffat: thank you for the quick response
9600 * 22 percent= 2112 but no idea how these other figures of 1722, 1316 came
The question says that the working capital will be increased each year at Yilandwe’s inflation rate.
So at time 1, they need extra working capital of 22% x 9600 = 2,112
The total working capital is now 9,600 + 2,112 = 11,712
Therefore at time 2, they need extra working capital of 14.7% x 11,712 = 1,722
The total working capital is now 11,712 + 1,722 = 13,434
Therefore at time 3, they need extra working capital of 9.8% x 13,434 = 1,316
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