22 - 22-28 (Cont'd.) =+ Perfect markets: = $120 + (Selling...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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 ...
View Full Document

Page1 / 2

22 - 22-28 (Cont'd.) =+ Perfect markets: = $120 + (Selling...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online