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.
<em>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.</em>
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
<em>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.</em>
<em>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.</em>
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) <u>900,000</u>
Potential loss to the group <u> (60,000)</u>
Potential loss to the whole corporation = $(60,000)
