Bug-Me-Not

Bug-Me-Not is a start-up biotechnology firm specializing in non-toxic pesticides for organic farming. Scientists at one of Bug-Me-Not's subsidiaries,Beetle Away, recently developed a new pesticide,N44, to rid crops of a particularly nasty genus of blue hair beetles, which destroy apple trees. In addition to producing this new pesticide, Beetle Away produces another pesticide,O77, for external sale.

Per kilogram (kg) data on the selling price, variable costs, machine hours necessary for production are given below:

N44O77

Selling price30.0013.50

Variable manufacturing cost5.505.00

Variable selling cost3.502.00

Machine hours2.0 hours0.5 hours

N44O77

External Market Monthly Demand (in kilograms)5,00010,000

Beetle Away has 16,500 machine hours of capacity available every month.

Another division of Bug-Me-Not, Lawn Life has an opportunity to process N44 further into a consumer product that would protect lawns from the Blue Hair beetle.Lawn Life would incur additional variable manufacturing costs of 7 per kilogram in reducing the potency of the pesticide and packaging it for home use. An outside distributor has offered Lawn Life 31/kg for up to 7,000 kgs of the modified N44 per month as long as it provided in 1,000 kg increments.

Beetle Away does not incur any variable selling costs for internal transfers. All divisions are only evaluated as profit centers.

Q1. What is the optimal transfer price per kg for Beetle Away to charge Lawn Life for the new pesticide,N44, for0 to 750 kgs? That is, figure outthe optimal TP per kg for any level of internal transfers of N44 between 0 and 750 kgs.10 points

Q2. What is the optimal transfer price per kg for Beetle Away to charge Lawn Life for the new pesticide,N44, for 751 to 5,750 kgs? That is, figure out theoptimal TP per kg for any level of internal transfers between 751 and 5,750 kgs.20 points

Q3. What is the optimal transfer price per kg for Beetle Away to charge Lawn Life for the new pesticide,N44, for 5,751 to 8,250 kgs? That is, figure out theoptimal TP per kg for any level of internal transfers between 5,751 and 8,250 kgs.20 points

Q4.Given the optimal transfer pricing schedule you calculated in Q1 - Q3 above,how many kilograms of N44 will the Lawn Life Division want transferred from the Beetle Away Division each month?20 points

Q5. By how much will total monthly profits at Bug-Me-Not increase or decrease at the level transfers you determined in Q4 compared to the status quo (i.e., with no modified N44)? Enter an increase as a positive number and a decrease as a negative number.20 points

Q6. For Q6 and Q7, assume that Bug-Me-Not has a policy of setting transfer prices equal to full absorption costs. For N44, the full absorption cost is 22/kg. How many kilograms of N44 will Lawn Life want transferred from the Beetle Away division each month at this transfer price?25 points

Q7. By how much will total monthly profits at Bug-Me-Not change at the level of transfers you determined in Q6 compared to the status quo (i.e., with no modified N44)? Enter an increase as a positive number and a decrease as a negative number.30 points