Question

Chapter 10 Homework Transfer Pricing, Idle Capacity Mouton & Perrier, Inc., has a number of divisions that produce liquors, bottled water, and glassware. The Glassware Division manufactures a variety of bottles that can be sold externally (to soft-drink and juice bottlers) or internally to Mouton & Perrier's Bottled Water Division. Sales and cost data on a case of 24 basic 12-ounce bottles are as follows: $2.95 Unit selling price Unit variable cost Unit product fixed cost* Practical capacity in cases *$350,000/500,000 $1.25 $0.70 500,000 During the coming year, the Glassware Division expects to sell 390,000 cases of this bottle. The Bottled Water Division currently plans to buy 100,000 cases on the outside market for $2.95 each. Ellyn Burridge, manager of the Glassware Division, approached Justin Thomas, manager of the Bottled Water Division, and offered to sell the 100,000 cases for $2.89 each. Ellyn explained to Justin that she can avoid selling costs of $0.12 per case by selling internally and that she would split the savings by offering a $0.06 discount on the usual price. Required: 1. What is the minimum transfer price that the Glassware Division would be willing to accept? Round to the nearest cent. $ per unit

Answer 1

Solution . Minimum price acceptable to Glass Division : 1.25 Variable Less: Saving in selling cost Minimum price acceptable to glass Division -0.12 1.13 2.95 Menimum price acceptable to water Division: e purchasing price from outside) yes. Purchasing price (100000 X3, 25) Cost If purchased from glass (100000 x 8:13) Net, Benefit If purchased from Glass 325000 113000 212000

o No (390000 + 100000) 490000 Total production fixed overheads 350000 0.71 per unit overhead ( 350000/490000) variable cost 1025 fixed cost 0.71 Total manufacturing cost 96 Yes, since this is still less price than from the purchase outside.