# 22 - 22-28(Cont'd = Perfect markets = \$120(Selling price...

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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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22 - 22-28(Cont'd = Perfect markets = \$120(Selling price...

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