GreenWorld Inc.is a nursery products firm.It has three divisions that grow and sell plants:the Western Division, the Southern Division, and the Eastern Division.Recently, the Southern Division of GreenWorld acquired a plastic factory that manufactures green plastic pots.These pots can be sold both externally and internally.Company policy permits each manager to decide whether to buy or sell internally.Each divisional manager is evaluated on the basis of ROI and EVA.

The Western Division had bought its plastic pots in lots of 100 from a variety of vendors.The average price paid was P75 per box of 100 pots.However, the acquisition made Rosario Sanchez Ruiz, manager of the Western Division, wonder whether or not a more favorable prize could be arranged.She decided to approach Lorenz Matthews, manager of Southern Division, to see if he wanted wanted to offer a better price for an internal transfer.She suggested a transfer of 3,500 boxes at P70 per box.

Lorenz gathered the following information regarding the cost of a box of 100 pots:

Direct materialsP35

Direct labor8

Variable overhead10

Fixed overhead10

Fixed overhead is based on P200,000/20,000 boxes.

Selling priceP75

Production capacity20,000 boxes

Required:

1.Conceptual Connection.Suppose that the plastics factory is producing at capacity and can sell all that it produces to outside customers.How should Lorenz respond to Rosario's request for a lower transfer price?

2.COnceptual Connection.Now assume that the plastics factory is currently selling 16,000 boxes.What are the minimum and maximum transfer price?Should Lorenz consider the transfer at P70 per box?

3.Conceptual Connection.Suppose that GreenWorld's policy is that all trnasfer prices be set at full cost plus 20%.Would the transfer take place?Why or why not?