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(c) The manager of Preparation Process (PP) has recently been contacted by an external customer who wishes to buy prepared potatoes from PP for their
(c) The manager of Preparation Process (PP) has recently been contacted by an external customer who wishes to buy prepared potatoes from PP for their business use. The following information has been gathered. The external market price is 20 per sack of prepared potatoes. The cost of preparing each sack of potatoes is 15, including 6 for direct materials, 4 for direct labour, 3 for variable production overhead and 2 for fixed overhead. If PP sells to the external customer, it would need to incur a packing and distribution cost of 1 per sack. PP is currently operating at full capacity. There is no plan to expand the capacity. Any shortage of supplies for the Cooking Process will be sourced from the market at the market price. I (i) Calculate the minimum transfer price per kg of prepared potatoes that would motivate PP to continue selling to the Cooking Process within the same company. [5 marks] BUSI2152-E1
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