Two divisions of ARF Company are currently arguing over the transfer price of bone meal that the Processing Dept. charges the Production Dept., which uses the bone meal to produce Tasty Treats. Current division cost information is as follows:

Bone meal is processed at a variable cost of $20 per unit [a 100-lb sack]. The Processing Dept.s fixed costs are $10 per unit. The market price of processed bone meal is $35 per unit.

The Production Dept uses bone meal to make Tasty Treats. The variable costs to produce Tasty Treats out of the bone meal are $10 per unit and the fixed costs are $5 per unit. The Tasty Treats sells for $40 per unit [50-lb case.]

Required: prepare a case analysis discussing the transfer price scenario that ARF is facing. Include the following in your analysis: a. What transfer price should Processing charge Production for bone meal? Why?

b. If both departments are treated as profit centers, is this the optimal price for each department? If not, what should the department managers do about it?

c. Is it the optimal price for ARF in terms of maximizing overall company profits?

d. Suppose there is no external market for bone meal. What transfer price should be used for decentralized decision-making in that scenario? If there is no market for bone meal, does it even make sense to produce Tasty Treats?