Information relevant to questions below:

Tutti Frutti Ltd$.$ is a fruit juice company which is part of the divisional ARP $($Address Resolution Protocol$)$ International Group $($ARPIG$).$ Tutti Frutti is a market leader, and it sells a wide range of juices to the catering sector $(10$ litre cartons$)$ and to the grocery sector $(0\mathrm{.}5$ litre cartons$).$ The sale of fruit juices in the catering sector has increased significantly in recent years to the extent that catering sector cartons now typically represent $80\%$ of Tutti Frutti$$s total sales volume. The company$$s production facility is currently working at full capacity $(10$ million litres per annum$)$ and the product cost information is:

$0\mathrm{.}5$ litre$-$carton $10$ litre$-$carton

Selling Price $$

$1\mathrm{.}5027\mathrm{.}00$

Manufacturing cost:

Ingredients $0\mathrm{.}306\mathrm{.}00$

Packaging $0\mathrm{.}153\mathrm{.}60$

Labour cost $0\mathrm{.}204\mathrm{.}00$

Variable overhead $0\mathrm{.}255\mathrm{.}00$

Fixed overhead $0\mathrm{.}204\mathrm{.}00$

ARPIG has recently acquired Jarvis Foods Ltd$,$ a company which specialises in producing tray$-$packed meals. The management of Jarvis has asked Tutti Frutti to supply $4\mathrm{.}5$ million of its $0\mathrm{.}5$ litre$-$cartons of juice in the next year at a price of $1\mathrm{.}25$ per carton. Jarvis will use the juice cartons as part of a new contract which they are hoping to acquire for the supply of $4\mathrm{.}5$ million pre$-$packed meals to all of the hospitals around Ireland.

Jarvis has estimated the cost of the pre$-$packed meal for the hospital contract would be as follows:

$$

Packed food items $($other suppliers$)2\mathrm{.}35$

Juice $($purchased from Tutti Frutti$)1\mathrm{.}25$

Other variable costs $0\mathrm{.}90$

Fixed overhead $1\mathrm{.}65$

Total $6\mathrm{.}15$

The management of Jarvis are aware that the competition to acquire the hospital contract is very intense. They have surmised that in order to be successful they must tender a price for the pre$-$packed meals of $6\mathrm{.}20$ per unit. Consequently, acquiring the juice cartons from Tutti Frutti at the price of $1\mathrm{.}25,$ as opposed to the market price of $1\mathrm{.}50,$ is essential to the viability of the company$$s bid. The management of Jarvis suspect that the management of Tutti Frutti might not be amenable to selling at a discount, so they have appealed to ARPIG to oversee the transfer pricing situation, commenting $$In our view, this hospital contract is a real opportunity for Jarvis. It will improve the company$$s market share and will utilise a significant portion of its spare capacity. Surely, everyone can see that if the contract is good for Jarvis, it is also good for ARPIG as a whole.$$

$1.$ Assume you are the manager of Tutti Frutti. Would you be in favour of Tutti Frutti supplying the required number of cartons to Jarvis at a unit price of $1\mathrm{.}25?(1$mark$)$

The following data is useful:

Variable costs per unit $=0\mathrm{.}90$

Contribution of a $0\mathrm{.}5-$litre carton $=0\mathrm{.}60$

Contribution of a $10-$litre carton $=8\mathrm{.}40=0\mathrm{.}42$ per half litre

$0\mathrm{.}5-$litre cartons make up $20\%$ of volume and $10$ litre cartons represent $80\%.$

Weighted contribution per $0\mathrm{.}5$ litre:

$0\mathrm{.}6$ x $20\%+0\mathrm{.}42$ x $80\%=0\mathrm{.}456$

Considering the data above, which of the following is correct?

$$ You would be in favour as the price of $1\mathrm{.}25$ per unit is more than variable costs and any lost contribution.

$$ You would not be in favour as the price of $1\mathrm{.}25$ per unit is less than variable costs and any lost contribution.

$$ You would be in favour as the price of $1\mathrm{.}25$ per unit is more than variable costs

$2.$ Is it in the financial interests of ARPIG as a whole, if Tutti Frutti were to supply the cartons of juice to Jarvis, and Jarvis was successful in acquiring the hospital contract at a price of $6\mathrm{.}20$ per tray$-$packed meal? You may assume all fixed costs are not relevant. $(6$ points$)$

Complete the blanks below. Enter answers to two decimals e$.$g$.9\mathrm{.}99.$

Is the hospital contract worthwhile?

Revenue tray$-$packed meal $6\mathrm{.}20$

Costs of Jarvis $$

Variable costs $($excluding juice$)3\mathrm{.}25$

Juice $1\mathrm{.}356$

Incremental loss$/$benefit per unit $1\mathrm{.}594$

Thus, the contract is not $($enter is or is not$)$ in the interest of the group.

From the group perspective, should the juice be purchased externally or transferred from Tutti Frutti?

Complete the blanks

The juice should be supplied $\_\_\_\_\_\_\_\_\_($internally$/$externally$)$ as the market price is $\_\_\_\_\_\_\_\_\_($higher$/$lower$)$ that the relevant cost of supply.

$1.$ The information following relates to a future product of Fabrica Factory Ltd$,$ a manu

hus, the contract is not $($enter is or is not$)$ in the interest of the group.

From the group perspective, should the juice be purchased externally or transferred from Tutti Frutti?

Complete the blanks

The juice should be supplied $\_\_\_\_\_\_\_\_\_($internally$/$externally$)$ as the market price is $\_\_\_\_\_\_\_\_\_($higher$/$lower$)$ that the relevant cost of supply.