Question

1. 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 basic 12-ounce bottles are as follows:

   Unit selling price	$2.85
   Unit variable cost	$1.25
   Unit product fixed cost*	$0.75
   Practical capacity in cases	560,000
   *$420,000/560,000

   During the coming year, the Glassware Division expects to sell 450,000 cases of this bottle. The Bottled Water Division currently plans to buy 97,640 cases on the outside market for $2.85 each. Ellyn Burridge, manager of the Glassware Division, approached Justin Thomas, manager of the Bottled Water Division, and offered to sell the 97,640 cases for $2.79 each. Ellyn explained to Justin that she can avoid selling costs of $0.12 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

   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 dollar.
     $ -----

   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

Answer 1

Unit variable cost	$               1.25
Less: avoid selling costs per unit	$               0.12
Minimum transfer price that the Glassware Division would be willing to accept	$               1.13
Maximum transfer price that the Bottled Water Division would be willing to pay (Hint: Market Price)	$               2.85
Unit variable cost	$               1.25
Less: avoid selling costs per unit	$               0.12
Unit variable cost for Internal transfer	$               1.13
Market price per unit	$               2.85
Less: Unit variable cost for Internal transfer	$               1.13
Contribution margin per unit	$               1.72
Multiply: Number of unit transferred	97,640
Increase in profit	$ 167,940.80
Increase in profit (Rounded to the nearest dollar)	$        167,941
Unit variable cost for Internal transfer	$               1.13
Unit product fixed cost	$               0.75
Full manufacturing cost per unit	$               1.88
Transfer price at Full manufacturing cost	$               1.88