Answer:
Potential loss to the whole corporation = $(60,000)
Explanation:
The Benson Division is operating at full capacity, hence it has no excess capacity .
This implies that it can not produce enough to meet both demand of internal and external buyers.
Hence, Benson Division cannot accommodate the demands of the Berna Division at a price lower than the external price, because it will result to a loss in contribution.
To maximize and optimize the group's profit in this scenario, the minimum transfer should be:
Minimum transfer price = External selling price - savings in selling cost resulting from in internal transfer
= $86-3= 83
Minimum transfer price = $83.
Effect on Group's profit
Any unit transferred at a priced lower than $83 would result in a unit loss to the Benson Division equal to $83 minus the transfer price.
Any unit transferred to Berna at a price lower that its current purchase cost would save the division an amount equal to the current purchase cost minus the forced transfer price.
The potential loss to the organization as a whole would be computed as the net effect of the following:
Lost contribution by Benson : The difference between the Minimum transfer price and the transfer imposed by the group company multiplied by the quantity transferred.
Savings made by the Berna Division : The difference between the forced transfer price and current purchase of Berna.
We can summarize the effect of the forced transfer price on the whole corporation as follows:
Lost contribution per unit = 83 - 35= 48 .
Savings made per unit = 80 - 35 = 45
$
Total lost contribution by Benson
(48 × 200,000) (960,000)
Savings made by Berna as result of the transfer
(45 × 200,000) 900,000
Potential loss to the group (60,000)
Potential loss to the whole corporation = $(60,000)
