I need help with part B. I got the first part. Plains Peanut Butter Company rece

Question

I need help with part B. I got the first part. Plains Peanut Butter Company recently acquired a peanut-processing company that has a normal annual capacity of 3,000,000 pounds and that sold 2,700,000 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 700,000 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:

Direct materials $0.50 Direct labor 0.26 Variable overhead 0.11 Fixed overhead at normal capacity 0.21 Total $1.08

Explanation / Answer

Own consumption Outside Sales Total Volume Per pound 700000 2300000 3000000 Sales 1124000 4600000 5724000 Direct Material 0.5 350000 1150000 1500000 Direct Labour 0.26 182000 598000 780000 Variable Overhead 0.11 77000 253000 330000 Total Variable Cost 0.87 609000 2001000 2610000 Contribution 515000 2599000 3114000 Fixed Cost 84000 483000 567000 Net Income 431000 2116000 2547000 Transfer required (in Pound) 700000 Less: Additional Capacity 300000 To be used from existing market share 400000 Sale to Current Market = 2,700,000-400,000 = 2,300,000 Transfer price: 300,000 pound x 1.08 324000 400,000 pound x 2.00 800000 Total Transfer price 1124000 Fixed cost for 400,000 pound

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