1. The lowest acceptable transfer price from the perspective of the selling
division is given by the following formula:
+
≥ Variable cost Total contribution margin on lost sales
Transfer price
per unit Number of units transferred
The Pulp Division has no idle capacity, so transfers from the Pulp Divi-
sion to the Carton Division would cut directly into normal sales of pulp
to outsiders. Since the costs are the same whether the pulp is trans-
ferred internally or sold to outsiders, the only relevant cost is the lost
revenue of $70 per ton from the pulp that could be sold to outsiders.
This is confirmed below:
($70 - $42) × 5,000
Transfer price $42 + = $42 + ($70 - $42) = $70
≥
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