question

The plastics Company manufactures plastic buckets. The bucket unit moulds the plastic buckets, which are transferred to the handles unit, where a plastic handle is fitted to each bucket. The bucket unit's variable cost is $12 per bucket, while the handles unit's variable cost is a further $5 per bucket. There is no intermediate market for moulded buckets without handles. The handles unit sells the completed product on an imperfect market. The selling price of the final product is as follows: Selling price of final Quantity sold per product month (units) $20 20 000 $18 10 000 $15 60 000 REQUIRED Marks (a) What are the merits and demerits of negotiation between unit managers as a means of arriving at a transfer price? (b) Suggest an appropriate range of transfer prices for the transfer of buckets from the bucket unit to the handles unit. 20 TOTAL MARKS 25