Robinson Company has a decentralized organization with a divisional structure. Each di¬

visional manager is evaluated on the basis of ROI.

The Plastics Division produces a plastic container that the Chemical Division can use.

Plastics can produce up to 100,000 of these containers per year. The variable costs of man¬

ufacturing the plastic containers are $4. The Chemical Division labels the plastic containers and uses them to store an important industrial chemical, which is sold to outside customers for $50 per container. The division's capacity is 20,000 units. The variable costs of process¬

ing the chemical (in addition to the cost of the container itself) are $26.

Required:

Assume each part is independent, unless otherwise indicated.

1. Assume that all of the plastic containers produced can be sold to external customers for

$10 each. The Chemical Division wants to buy 20,000 containers per year. What should the transfer price be?

2. Refer to Requirement 1. Assume $1 of avoidable distribution costs. Identify the maxi¬

mum and minimum transfer prices. Identify the actual transfer price, assuming that ne¬

gotiation splits the difference.

3. Assume that the Plastics Division is operating at 75% capacity. The Chemical Division is currently buying 20,000 containers from an outside supplier for $7.50 each. Assume that any joint benefit will be split evenly between the two divisions. What is the ex¬
pected transfer price? How much will the profits of the firm increase under this arrange¬
ment? How much will the profits of the Plastics Division increase, assuming that it sells the extra 20,000 containers internally?
4. Assume that both divisions have excess capacity. Currently, 15,000 containers are be¬
ing transferred between divisions at a price of $8. The Chemical Division has an op¬
portunity to take a special order for 5,000 containers of chemical at a price of $33.75 per container. The manager of the Chemical Division approached the manager of the Plas¬
tics Division and offered to buy an additional 5,000 plastic containers for $5 each. As¬
suming that the Plastics Division has excess capacity totaling at least 5,000 units, should the manager take the offer? What is the minimum transfer price? The maximum? As¬
sume that the manager of the Plastics Division counters with a price of $5.50. Would the manager of the Chemical Division be interested?