Appropriate Transfer Prices: Opportunity Costs Plains Peanut Butter Company rece

Question

Appropriate Transfer Prices: Opportunity Costs
Plains Peanut Butter Company recently acquired a peanut-processing company that has a normal annual capacity of 4,000,000 pounds and that sold 2,800,000 pounds last year at a price of $2.00 per pound. The purpose of the acquisition is to furnish peanuts for the peanut butter plant, which needs 1,600,000 pounds of peanuts per year. It has been purchasing peanuts from suppliers at the market price. Production costs per pound of the peanut-processing company are as follows:

Explanation / Answer

Question not clear about capacity utilization levels in this year so i assumed and solved under the existing capacity utilization and full capacity utilization.

calculation of gross profit for the peanut division transper price is $ 2.00

gross profit for last year capacity levels= $ 5,600,000-$ 4,320,000

= $ 2,576,000

gross profit for full capacity utilization levels= $ 8,000,000-$ 4,320,000

= $ 3,680,000

calculation of gross profit for the peanut division transper price is $ 1.08

gross profit for last year capacity levels= $4,128,000 -$ 3,024,000

= $ 1,104,000

gross profit for full capacity utilization levels= $ 6,528,000-$ 4,320,000

= $ 2,208,000

particulars Existing capacity level full capacity level annual sales 2,800,000 4,000,000 transper to penut butter divison 1,600,000*$ 2.00=$ 3,200,000 1,600,000*$ 2.0=$ 3,200,000 sales to outsiders 1,200,000*$ 2.0=$2,400,000 2,400,000* $ 2.0=$4,800,000 cost of sales 2,800,000*1.08=$ 3,024,000 4,000,000*1.08=$ 4,320,000

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