PT, BERUANG SUSU operates two divisions. Dairy Division and Dairy Products Division. Divisional managers are evaluated based on their return on investment. The dairy division is capable of producing 500,000 gallons of milk per year. The dairy division uses milk to produce ice cream, regular cheese and specialty cheese, the following is the data for the dairy division: Selling price per gallon $2.25 Variable production cost $0.50 Fixed production cost* $1.00 *for an output of 500.00 gallons The dairy division uses 600,000 gallons of milk when operating at full capacity.

Requested: 1. Assume that the dairy division is able to sell all of its production. The dairy division operates at 90 percent capacity. The division can afford to buy all the milk it needs from outside suppliers for $2.35 per gallon. What are the minimum and maximum transfer prices? What transfer price do you recommend? How many gallons of milk will the dairy division buy internally, assuming that the division is operating at 90 percent capacity? 2. Refer to question 1. What would your answers be if the dairy division was able to avoid a distribution fee of $0.50 per gallon through internal sales?