Transfer Pricing, Idle Capacity Mouton & Perrier, Inc., has a number of division

Question

Transfer Pricing, Idle Capacity Mouton & Perrier, Inc., has a number of divisions that produce liquors, bottled water, and glassware. The Glassware Divislon 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 Unit variable cost Unit product fixed cost* Practical capacity in cases $350,000/500,000 $2.95 $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 Divisiorn 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.

Explanation / Answer

Part-1 . Computation of MiniumumPrice , Maximum Price and benefit or Loss as a whole Computation of Minimum Transfer Price Unit Variable Cost 1.25 Less : Avoidable Selling Cost $0.12 Minimum Transfer Price $1.13 Computation of Minimum Transfer Price Purchase Price of Bottle Water Division from Outside 2.95 Minimum Transfer Price $2.95 Computation of Benefit/Loss , if internal transfer took place Maximum Transfer Price 2.95 Minimum Transfer Price 1.13 Benefit/Cases 1.82 Total Benefit /Cases ( $1.82*100000 Cases) $182,000 An internal transfer should take place Since the Glassware Division has idle capacity, the minimum price is $0.93. 3) Computation of Transfer Price at Full manufacturing cost Variable Cost $1.25 Fixed Cost $0.70 Full Manufacturing Cost $1.95 Transfer price is $1.95 .The transfer might take place since $1.95 is between the minimum and maximum prices of the negotiating set.

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