PRICING DECISIONS

Basic data
Selling price to external 49
Variable cost per unit 28
Capacity 200000
contribution margin lost 21
a. Revco is operating at full capacity
Internal sales IM's External purchase
opportunity cost
Relevant cost per unit = (lost MC) + variable cost
21 + 24
Relevant cost per unit = ($ 45) ($ 47)

internal relevant cost is less than the external selling price => Choose the internal transfer (both benefit)
$45<=Transfer price<= $47
b. Revco Electronics has sufficient existing capacity (Opportunity cost (MC lost) =0)
Opportunity cost (lost
contribution margin) 0
Internal sales IM's External purchase
Relevant cost per unit = opportunity cost + variable cost
0 + 28
Relevant cost per unit = ($ 28) ($ 47)

internal selling price is less than the $47 it would cost if International Motor purchase from external party => Choose the internal transfer
28<=Transfer price should be<= 47
c. Special order
Internal sales IM's External purchase
Relevant cost per unit = opportunity cost + variable cost
lost contribution margin + 40
21 + 40
Relevant cost per unit = ($ 61) ($ 47)

internal relevant cost is more than the $47 it would cost if International Motor purchase from external party
15000/20000 products is a significant amount
Choose the external purchase
 Basic data
CA $400.000
LTA $600.000
TA $1.000.000
PO 200.000 baseball per month
Target ROI 30%
FC $400.000 per month
VC $4 per baseball

Target ROI per unit= $1,50

Total cost per unit= $6
Minimum selling price= $7,50
Predicted Costs of 10000 Starter Sets
DM per set 60
DL per set 20
VLC per set 5
Total 85
VOR 8 per direct LH
FOR 12 per direct LH
FC 200000

Targeting income per unit 31,75

Total unit cost 125,0012
Selling price 156,7512
Markup percentage (%) 25,39975616