The Lyn Division of Rosal Homes Inc. produces and sells lumber that can be sold to outside customers or within the company to the Mel Division. The following data have been gathered for the coming...

The Lyn Division of Rosal Homes Inc. produces and sells lumber that can be sold to outside customers or within the company to the Mel Division. The following data have been gathered for the coming period:

                        Lyn Division:

                        Capacity                                                100,000 board feet

                        Price per board foot                                 P4.00

                        Variable production cost per board foot       P2.00

                        Variable selling cost per board foot             P0.70

                        Mel Division:

                        Board feet needed                                    40,000

                        Outside price paid per board foot                P3.50

If the Lyn Division sells to the Mel Division, P0.40 per board foot can be saved in shipping costs.

1. If Lyn Division has sufficient excess capacity to fulfill the Mel Division’s needs, what will be the effect on the company’s overall contribution margin if the transfer price negotiated is P2.40?


2. If Lyn Division has sufficient excess capacity to fulfill the Mel Division’s needs, what will be the effect on the profit of Mel Division if the transfer price negotiated is P2.40?


3. If Lyn Division has sufficient excess capacity to fulfill the Mel Division’s needs, what will be the effect on the profit of the company as a whole if the transfer price of P2.40 is change to P2.70?