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 price32.0015.00

Variable manufacturing cost5.005.00

Variable selling cost4.002.00

Machine hours2.0 hours0.5 hours

N44O77

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

Beetle Away has 16,000 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 4 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 pricing price for Beetle Away to charge Lawn Life for the new pesticide, N44, for 0 to 500 kgs? That is, figure out the optimal TP for any level of internal transfers between 0 and 500 kgs.

Q2. What is the optimal transfer pricing price for Beetle Away to charge Lawn Life for the new pesticide, N44, for 501 to 5,500 kgs? That is, figure out the optimal TP for any level of internal transfers between 551 and 5,500 kgs.

Q3. What is the optimal transfer pricing price for Beetle Away to charge Lawn Life for the new pesticide, N44, for 5,501 to 8,000 kgs? That is, figure out the optimal TP for any level of internal transfers between 5,501 and 8,000 kgs.

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?

Q5. By how much will total monthly profits at Bug-Me-Not change at this level of transfers compared to the status quo (i.e., with no modified N44)?

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 25/kg. How many kilograms of N44 will Lawn Life want transferred from the Beetle Away division each month at this transfer price?

Q7. By how much will total monthly profits at Bug-Me-Not change at this level of transfers compared to the status quo (i.e., with no modified N44)?