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

Answer:

Full manufacturing cost is = $1.83

Explaination to the answer:

Full manufacturing cost is =

= ($1.25 – $0.12) + $0.70

=$1.83

so $1.83 would be the transfer price.

The transfer could take place since $1.83 is between the minimum and maximum prices of the negotiating set, $ 1.13 < $ 1.83 < $ 2.95.

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