If you refer to the receiving division (Bergen) in the schedule of profit calculations you will see that
expanding output from 1000 to 2000 units results in total revenues increasing from £100 000 to £180 000
so the marginal revenue is £80 000. Also variable conversion costs increase from £7000 to £14 000 so
marginal cost is £7000. Therefore net marginal revenue is £73 000 (£80 000 – £7000). Faced with a transfer
price of £35 000 per 1000 units the Bergen division will not expand output beyond 3000 units because the
transfer price paid for each batch exceeds the net marginal revenue.
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