whic lly 6 start projects PRICING. Cold Springs has four bution. They are run as
ID: 2570909 • Letter: W
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whic lly 6 start projects PRICING. Cold Springs has four bution. They are run as independent unit subunits. Filtering, Bottle Production, Distri andutput either to the next subunit in line in thectually buy ottin inputs or s dependin either or sell their on the path that ooperating in selling product to each oth izes their profit. The company currently has all four s and can a their in selling product to each other at omany curtens on Recently Bottlin time on the line. water bottled. It cost plus a reasonable proft d by an outside customer who would like to buy This customer would pay the going market pri uld tanker the water into Botting's holding tank cust ice of $0.05 per bottle of ottling's holding tank and would pick up the he line. This outside customer would want 250,000 bottles ervices to Cold Springs for $0.04 a bottle because it is tanker This o tled water at the end of bo filled Bottling c MANAGEMENT ACCOUNTINGExplanation / Answer
a.) The Bottling subunit will have a profit of $0.02(0.05-0.03) if it sells 250,000 units to outside customer amounted to total profit of $5,000(250,000*0.02) with a margin of 40%(0.02/0.05). Due to this sale, the cost for sale in internal department will increased by $0.015 per unit amounted to $3,750 if the company decides to fulfill the demand of internal department by working overtime.The profit margin after sale to outside customer and working overtime is calculated as follows:-
The overall profit margin reduced in this case, thus selling outside and working overtime will not be profitable to company as it results in decrease in net profit margin from 33.33% to 31.82%.
But if the company send the internal business to a competitor, then it will be profitable for both the department internally as the bottling's profit margin will increase from 33.33% to 40% and the buying internal department will save $0.01(0.06-0.05) per unit. Thus Bottling subunit should sell to the outside customer and send the internal business to the competitor.
b.) As we have already discussed in above part a.) that this decision will result in increase in profit margin to 40% from 33.33% to Bottling subunit. But the impact on company's profits is shown as follows:-
Thus the overall profit of the company as a whole will decrease by $2,500 by the decision given in part a) because it will be beneficial for both the departments individually but not beneficial for the company as a whole.
c.) The transfer price should be $0.05 or less as market price of competitor is $0.05, So that the company should not pay market to any other company. Thus whether the company sell to outside customer or not, it should produce for the internal subunit internally and charge tranfer price upto maximum of $0.05.
Total Profit [(250,000*$0.02)+(250,000*$0.015)] 8,750 Sales[(250,000*$0.05)+(250,000*$0.06)] 27,500 profit margin (8,750/27,500)*100 31.82%Related Questions
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