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Unformatted text preview: 22-28 (Cont'd.) =+ Perfect markets: = $120 + (Selling price Outlay costs per unit) = $120 + ($200 $120) = $200 Imperfect markets: = $120 + = $120 + = $175
aMarginal revenues of Division A from selling 200 units outside rather than transferring to Division B = ($195 1,000) ($200 800) = $195,000 $160,000 = $35,000. bIncremental (outlay) costs incurred by Division A to produce 200 units = $120 200 = $24,000. Therefore, selling price ($195) and marginal revenues per unit ($175 = $35,000 200) are not the same. The following discussion is optional. These points should be explored only if there is sufficient class time: Some students will erroneously say that the "new" market price of $195 is the appropriate transfer price. They will claim that the general guideline says that the transfer price should be $120 + ($195 $120) = $195, the market price. This conclusion assumes a perfect market. But, here, there are imperfections in the intermediate market. That is, the market price is not a good approximation of alternative revenue. If a division's sales are heavy enough to reduce market prices, marginal revenue will be less than market price. It is true that either $195 or $175 will lead to the correct decision by B in this case. But suppose that B's variable costs were $120 instead of $150. Then B would buy at a transfer price of $175 (but not at a price of $195, because then B would earn a negative contribution of $15 per unit [$300 ($195 + $120)]. Note that if B's variable costs were $120, transfers would be desirable: Division A contribution is: 800 ($200 $120) + 200 ($175 $120) = Division B contribution is: 200 [$300 ($175 + $120)] = Total contribution $75,000 1,000 $76,000 ...
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