Transfer Pricing, Idle Capacity Mouton & Perrier, Inc., has a number of divisions that produce liquors, bottled water, and glassware. The Glassware Division manufactures a variety of bottles that can be sold externally (to soft drink and juice bottlers) or internally to Mouton & Perrier's Bottled Water Division Sales and cost data on a case of 24 basie 12-ounce bottles are as follows: Unit selling price $3.10 Unit variable cost $1.20 Unit product fixed cost $0.75 Practical capacity in cases 510,000 *$382,500/510,000 During the coming year, the Glassware Division expects to sell 390,000 cases of this bottle. The Bottled Water Division currently plans to buy 103,720 cases on the outside market for $3.10 each. Ellyn Burridge, manager of the Glassware Division, approached Justin Thomas, manager of the Bottled Water Division, and offered to sell the 103,720 cases for $3.04 each. Ellyn explained to Justin that she can avoid selling costs of $0.13 per case by selling internally and that she would split the savings by offering a $0.06 discount on the usual price. Required: 1. What is the minimum transfer price that the Glassware Division would be willing to accept? Round to the nearest cent. per unit What is the maximum transfer price that the Bottled Water Division would be willing to pay? Round to the nearest cent. per unit Should an internal transfer take place? Yes be su What is the maximum transfer price that the Bottled Water Division would be willing to pay Round to the nearest cent. per unit Should an internal transfer take place? Yes What would be the benefit (or loss) to the firm as a whole if the internal transfer takes place? When required, round your answer to the nearest der Benefits 2. Suppose Justin knows that the Glassware Division has idle capacity. Do you think that he would agree to the transfer price of $3.04? No Suppose he counters with an offer to pay $2.55. If you were Ellyn, would you be interested in this price Yes 3. Suppose that Mouton & Perrier's policy is that all internal transfers take place at full manufacturing cost. What would the transfer price be? Round to the nearest cent. $ per unit Would the transfer take place? Yes Feedback Check My Work 1. The minimum transfer price is the transfer price that would leave the selling division no worse off if the good is sold to an internal division. Note that the selling division would prefer a higher price; however, the minimum transfer price is the absolute lowest that could be accepted. The maximum transfer price is the transfer price that would leave the buying division no worse off if an input is purchased from an internal division. Note that the buying division would prefer a lower price; however, the maximum transfer price is the absolute highest that could be accepted. Check My Work Previous Next >
