Spicy Red Pty Ltd has two divisions: Chilii Division (that farms chilies) and Sauce Division (that makes chilli sauce). Spicy Red requires that all transfers between divisions be recorded at variable cost as a transfer price. Divisional managers have complete autonomy in choosing their sources of customers and suppliers.

The capacity for the Chilli Division is 250,000 kgs of chillies per month. Chilli Division sells 40% cent of its chillies to the Sauce Division, while the remainder of the sales are to external customers. The monthly budget information for the Chilli Division, based on full capacity, is presented below.

	Sauce Division	External Sales	Total
Kilograms of chillies sold	100,000	150,000	250,000
Sales ($)	10,000	22,500	32,500
Variable costs ($)	10,000	15,000	25,000
Fixed costs ($)	2,000	6,000	8,000

Chilli Division receives a special offer from a new customer for 92,000 kgs of chilies at a special price of $0.34 per kg. If the special offer were accepted, Chilli Division would be unable to supply those units to the Sauce Division. The Sauce Division could purchase chilies from an external supplier for the price of $0.4 per kg.

Question 1

Assuming the Chilli Division manager agrees to the special offer, calculate the effect of the decision on the profit of Spicy Red as a whole. Please incorporate a negative sign if the answer is a reduction in profit.

Question 2

Calculate the total opportunity cost Chilli Division will incur if they meet the internal demand from Sauce Division.

Question 3

Calculate the transfer price of one kilogram of chilli using the general transfer-pricing formula.