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Exercise 12A-3 (continued)
2. a. Each of the 10,000 units transferred to the Motor Division must
displace a sale to an outsider at a price of $40. Therefore, the selling
division would demand a transfer price of at least $40. This can also
Problem 12A-4 (continued)
4. When the selling division has no idle capacity, as in part (3), market
price works very well as a transfer price. The cost to the company of a
transfer when there is no idle capacity is the lost revenue from sales to
Problem 12A-5 (continued)
b. The loss in potential profits to the company as a whole will be:
Division B’s outside purchase price ..............................
$39
Division A’s variable cost on the internal transfer .........
36
Potential added contribution margin lost to the
company as a whole ................................................
$ 3
Number of units ........................................................
×70,000
Potential added contribution margin and company
profits forgone ........................................................
$210,000
Another way to derive the same answer is to look at the loss in
potential profits for each division and then total the losses for the
impact on the company as a whole. The loss in potential profits in
Division A will be:
Suggested selling price per unit ..................................
$38
Division A’s variable cost on the internal transfer .........
36
Potential added contribution margin per unit ...............
$ 2
Number of units ........................................................
×70,000
Potential added contribution margin and divisional
profits forgone ........................................................
$140,000
The loss in potential profits in Division B will be:
Outside purchase price per unit ..................................
$39
Suggested price per unit inside ...................................
38
Potential cost avoided per unit ....................................
$ 1
Number of units ........................................................
×70,000
Potential added contribution margin and divisional
profits forgone ........................................................
$70,000
The total of these two amounts ($140,000 + $70,000) equals the
$210,000 loss in potential profits for the company as a whole.
