Exercise 10.12 Transfer Pricing, Idle Capacity Mouton & Perrier, Inc., has a num

Question

Exercise 10.12
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:

During the coming year, the Glassware Division expects to sell 390,000 cases of this bottle. The Bottled Water Division 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.

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

Should an internal transfer take place?
Yes or NO

What would be the benefit (or loss) to the firm as a whole if the internal transfer takes place?
Benefit or Loss $__?___

2. Suppose Justin knows that the Glassware Division has idle capacity. Do you think that he would agree to the transfer price of $2.89?
Yes or No

Suppose he counters with an offer to pay $2.40. If you were Ellyn, would you be interested in this price?
Yes or No

3. Suppose that Mouton & Perrier’s policy is that all internal transfers take place at full manufacturing cost. What would the transfer price be? Round to the nearest cent.
$____?_____ per unit

Would the transfer take place?
Yes or No

Explanation / Answer

1) As there is idle capacity available with the glassware Division the minimum transfer price assceptable to the Division should be to cover its variable cost , which in this case is $ 1.25 Bottled water division would be willing to pay any amount which is lower than the current market price it is being offered As it is being offered $ 2.95 from outside supplier, a price of $2.89 should be acceptable Yes , An internal transfer should take place as there is idle capacity available with the glassware division and it should be able to utilise the same If an internal transfer takes the benefit will be in absorption of fixed manufacturing cost over a larger unit base This is because there is idle capacity Current fixed cost absorbed by Glassware Division is 350000/390000 = 0.8974359 But if additional 100000 units are sold internally , then the fixed cost per unit would reduce to 350000/490000 = 0.714286 This would enable the total cost of the product to reduce by 0.90 - 0.71 = 0.19 per unit Hence the total benefit = 490000 * 0.19 = 93100 2) If Justin knew that the Glassware Division has idle capacity he would not agree to the transfer price, this is because the price asked by glassware division is higher than what it should be the minimum price of transfer Yes , if I was allen I would be interetsed in this price as it is higher than the variable cost for the division, As there is idle capacity a price of $2.40 would give a profit to the division hence this offer should be accepted 3) The total manufacturing cost is Variable cost 1.25 Fixed manufactuting cost (350000/490000) 0.72 Total manufacturing cost 1.97 Hence transfer price at full manufacturing cost = 1.97 Yes , the transfer should take place as this price is beneficial to beneficial to both the division For glass division , the price covers its variable cost and gives it a contribution to cover its fixed cost ( as there is idle capacity) For glass division , the price covers its variable cost and gives it For bottled division it is beneficial as it ia able to get the bottles at a price lower than the current market price which enables the division to make a larger profit

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.