Perfumes Ltd has two divisions: the Perfume Division and the Bottle Division. The company isdecentralised and each division is evaluated as a profit centre. The Bottle Division producesbottles that can be used by the Perfume Division. The Bottle Division's variable manufacturingcost per unit is $3.00 and shipping costs are $0.20 per unit. The Bottle Division's external salesprice is $4.00 per unit. No shipping costs are incurred on sales to the Perfume Division. ThePerfume Division can purchase similar bottles in the external market for $3.50.The Bottle Division has sufficient capacity to meet all external market demands in addition tomeeting the demands of the Perfume Division.Required:a) Using the general rule, determine the minimum transfer price. b) Assume the Bottle Division has no excess capacity and can sell everything producedexternally. Would the transfer price change? c) Assume the Bottle Division has no excess capacity and can sell everything producedexternally. What is the maximum amount Perfume Division would be willing to pay for thebottles? d) When is it more appropriate to use market-based transfer price rather than cost-basedtransfer price?
Perfumes Ltd has two divisions: the Perfume Division and the Bottle Division. The company is
decentralised and each division is evaluated as a profit centre. The Bottle Division produces
bottles that can be used by the Perfume Division. The Bottle Division's variable
cost
price is $4.00 per unit. No shipping costs are incurred on sales to the Perfume Division. The
Perfume Division can purchase similar bottles in the external market for $3.50.
The Bottle Division has sufficient capacity to meet all external market demands in addition to
meeting the demands of the Perfume Division.
Required:
a) Using the general rule, determine the minimum transfer price.
b) Assume the Bottle Division has no excess capacity and can sell everything produced
externally. Would the transfer price change?
c) Assume the Bottle Division has no excess capacity and can sell everything produced
externally. What is the maximum amount Perfume Division would be willing to pay for the
bottles?
d) When is it more appropriate to use market-based transfer price rather than cost-based
transfer price?
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