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Transfer Pricing Project (10 points) Name__________________________________________

Adapted from Hansen, Mowen and Guan Cost Management: Accounting and Control, 6^th ed.

Chapin, Inc. owns a number of food service companies. Two divisions are the Coffee Division and the Donut Shop Division. The Coffee Division purchases and roasts coffee beans for sale to supermarkets and specialty shops. The Donut Shop Division operates a chain of donut shops where the donuts are made on the premises. Coffee is an important item for sale along with the donuts and, to date, has been purchased from the Coffee Division. Company policy permits each manager the freedom to decide whether or not to buy or sell internally. Each divisional manager is evaluated on the basis of return on investment.

Recently, an outside supplier has offered to sell coffee beans, roasted and ground, to the Donut Shop Division for $4.00 per pound. Since the current price paid to the Coffee Division is $4.50 per pound, Brandi Alzer, the manager of the Donut Shop Division, was interested in the offer. However, before making the decision to switch to the outside supplier, she decided to approach Raymond Jasson, manager of the Coffee Division, to see if he wanted to offer an even better price. If not, then Brandi would buy from the outside supplier.

Upon receiving the information from Brandi about the outside offer, Raymond gathered the following information about the coffee:

Direct materials	$ 0.90
Direct labor	0.40
Variable overhead	0.70
Fixed overhead*	1.50
Total unit cost	$3.50

*Fixed overhead is based on $1,500,000/1,000,000 pounds

Selling price per pound	$4.50
Production capacity	1,000,000 pounds
Internal sales (to Donut)	100,000 pounds

Suppose that the Coffee Division is producing at capacity and can sell all that it produces to outside customers.

CM/Unit (coffee division) $__________/unit Minimum transfer price $__________/unit

Maximum transfer price $__________/unit

Will a transfer be made? _____________

Should a transfer be made? _____________

If no internal transfer is made, all sales are to outside customers, compute: (circle one)

Total effect on Coffee Division contribution margin $_____________ increase or decrease?

Total effect on Donut Division contribution margin $_____________ increase or decrease?

Total effect on Chapin Company contribution margin $_____________ increase or decrease?