XYC Inc, a major pest to the tomato crop, are now being controlled by toxic pesticides. The firm ABC invested $5 million in R&D over the last five years to produce a genetically engineered, patented microbe, AK-47, which controls tomato beetles in an environmentally safe way. ABC built a plant with capacity to produce 10,000 pounds of AK-47 per month. The plant cost $12 million and has a 10-year life. AK-47 has a variable cost of $3 per pound. Fixed costs are $50,000 per month for such costs as plant management, insurance, taxes, and security. Plant depreciation is not included in the $50,000 fixed cost. ABC evaluates the plant as an autonomous profit center like it treats its other divisions.

The plant is currently selling 8,000 pounds of AK-47 per month to tomato farmers for $30 per pound. Another division of ABC, Get-a-Life, wants to secure 1,000 pounds per month of AK-47 that it will process further into a consumer product, Not-so-safe, for gardeners. Get-a-Life is willing to pay an internal transfer price of $5 per pound. Get-a-Life will incur an additional $4 of variable cost per pound of AK-47 in packaging and reducing the potency of AK-47 to make Not-so-safe more appropriate for home gardeners. Not-so-safe will sell for $20 per pound.

Would it be beneficial for the firm for the transfer to take place? Provide quantitative justification along with qualitative interpretations.?

Does your answer to part 1 (re: whether this transfer is beneficial for the firm) depend on the transfer price? Provide a specific explanation for your conclusion, whether yes or no?.

Discuss the suggested internal transfer price of $5 per pound of AK-47. Specifically, is the plant likely to accept this price and why/why not?

After deciding to use a transfer price of $5 per pound for 1,000 pounds per month of AK-47, the plant receives new orders from tomato farmers for 2,000 additional pounds of AK-47 at $30 per pound. Outline: a) the various options facing the firm, and b) a recommended course of action. Hint: for full credit, there are 2 options that you should compare quantitatively and analyze to support your recommended course of action.