Question
GREY Inc. has many divisions that are evaluated on the basis of ROI. One division, Centra, makes boxes. A second division, Mantra, makes chocolates and
GREY Inc. has many divisions that are evaluated on the basis of ROI. One division, Centra, makes boxes. A second division, Mantra, makes chocolates and needs 80,000 boxes per year. Centra incurs the following costs for one box:
Direct materials | P0.35 |
Direct labor | P0.60 |
Variable overhead | P0.40 |
Fixed overhead | P0.13 |
Total | P1.48 |
Centra has the capacity to make 700,000 boxes per year. Mantra currently buys its boxes from an outside supplier for P1.80 each (the same price that Centra receives).
1. Assume that CM Inc. mandates that any transfers take place at full manufacturing cost. What would be the transfer price if Centra transferred boxes to Mantra?
2. Assume that CM Inc. allows division managers to negotiate transfer price. Centra is producing 600,000 boxes. If Centra and Mantra agree to transfer boxes, what is the ceiling of the bargaining range and which division sets it?
3. Assume that CM Inc. allows division managers to negotiate transfer price. Centra is producing 600,000 boxes. If Centra and Mantra agree to transfer boxes, what is the floor of the bargaining range and which division sets it?
4 . Assume that CM Inc. allows division managers to negotiate transfer price. Alpha is producing 700,000 boxes. If Centra and Mantra agree to transfer boxes, what is the floor of the bargaining range and which division sets it?
5. Assume that the minimum profit level accepted by the company is a markup of 30 percent. What would be the transfer price if Centra uses full cost plus markup?
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