Question

Better Food Company recently acquired an Olive Oil Processing division that has an annual capacity of 2,000,000 bottles of oil. The new division has been selling1,000,000 bottles of oil to the outside market for $4 per bottle, but Better Food wants the new division to transfer (or sell) 1,000,000 bottles of oil to the Pizza Manufacturing division. As of now, the Pizza Manufacturing is buying oil from Italy for $4.50. The current oil per unit cost for 2,000,000 bottles is:

Dir Materials per bottle	$1.00
Dir labor per bottle	0.50
Variable OH	0.24
Fixed OH	0.40
Total	$2.14

As a company controller, what is the appropriate transfer price range that will make the new Olive Oil division and the Pizza Manufacturing division interested in this transfer?

The minimun transfer price is?

The maximum transfer price is?

Answer 1

Solution:

Minimum transfer price = Total Variable Cost per unit = $1.00 + $0.50 + $0.24 = $2.74

Maximum transfer price = Purchase price from outside market = $4.50