Page 115 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes 10% reduction if volume drops 75000
Which should be borne by 25000 unit’s ? ` 3 per unit
87
5. Transfer price:

Out of 125,000 units, market can absorb 110,000 units,
Hence, for balance 15000 units opportunity cost is zero
The transfer price for 15000 units will be variable cost
i.e., ` 84

10000 units as for part (1) ` 98
2. Contribution per unit - Division Y
Selling price 240
Less variable cost

Manufacturing costs (Division Y) 100
Transfer price from Division X 98
Variable selling expenses 6 204
Contribution margin per unit 36

Yes, division Y is advised to buy from division X
3. Division Y:
Revised selling price 200
Less variable cost (Part II) 204

Contribution -4
Firm Sell externally Transfer to Y
Selling price per unit ` 100 ` 200
Out of pocket expenses

Division X 86 84
Division Y - 106

Contribution margin 14 10
Therefore, Division Y should not buy at that price. Yes, it would be desirable from the
stand point of the firm, not to buy at that price due to higher contribution margin on
external sales.
6. Determination of transfer price:
Sales revenue 50000 × 100
` 50, 00,000
Less variable manufacturing & selling 50000 x 86
` 43, 00,000

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