Question

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: Unit selling price $3.05 Unit variable cost $1.30 Unit product fixed cost $0.70 Practical capacity in cases 570,000 *$399,000/570,000 During the coming year, the Glassware Division expects to sell 460,000 cases of this bottle. The Bottled Water Division currently plans to buy 98,640 cases on the outside market for $3.05 each. Ellyn Burridge, manager of the Glassware Division, approached Justin Thomas, manager of the Bottled Water Division, and offered to sell the 98,640 cases for $3.00 each. Ellyn explained to Justin that she can avoid selling costs of $0.14 per case by selling internally and that she would split the savings by offering a $0.05 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 What is the maximum transfer price that the Bottled Water Division would be willing to pay? Round to the nearest cent. per unit

Answer 1

Answer the requirements as follows: Particulars 2 Variable cost per unit 3 Less: Selling expenses I Bc Amount $ 1.30 $ 0.14 or $1.16 if not $ 1.2 rounded off 4 Minimum Transfer price that Glassware would be willing to accept 6 Maximum Transfer price that Bottled water division would be willing to pay $3.05 7 The maximum transfer price that bottled water would be willing to pay would be the price at 8 which it purchases from in the outside market which is $3.05. For any queries/doubts, please post in comment section. I would take up the same.