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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: During the coming year, the Glassware Division expects to sell 390,000 cases of this bottle. The Bottled Water Division currently plans to buy 100,000 cases on the outside market for $2.95 each. Ellyn Burridge, manager of the Glassware Division, approached Justin Thomas, manager of the Bottled Water Division, and offered to sell the 100,000 cases for $2.89 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? What is the maximum transfer price that the Bottled Water Division would be willing to pay? Should an internal transfer take place? What would be the benefit (or loss) to the firm as a whole if the internal transfer takes place? 2. Suppose Justin knows that the Glassware Division has idle capacity. Do you think that he would agree to the transfer price of $2.89? Suppose he counters with an offer to pay $2.40. If you were Ellyn, would you be interested in this price? Explain with supporting computations. 3. Suppose that Mouton & Perrier’s policy is that all internal transfers take place at full manufacturing cost. What would the transfer price be? Would the transfer take place?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 10, Problem 12E
Textbook Problem
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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:

Chapter 10, Problem 12E, Mouton  Perrier, Inc., has a number of divisions that produce liquors, bottled water, and glassware.

During the coming year, the Glassware Division expects to sell 390,000 cases of this bottle. The Bottled Water Division currently plans to buy 100,000 cases on the outside market for $2.95 each. Ellyn Burridge, manager of the Glassware Division, approached Justin Thomas, manager of the Bottled Water Division, and offered to sell the 100,000 cases for $2.89 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. 1. What is the minimum transfer price that the Glassware Division would be willing to accept? What is the maximum transfer price that the Bottled Water Division would be willing to pay? Should an internal transfer take place? What would be the benefit (or loss) to the firm as a whole if the internal transfer takes place?
  2. 2. Suppose Justin knows that the Glassware Division has idle capacity. Do you think that he would agree to the transfer price of $2.89? Suppose he counters with an offer to pay $2.40. If you were Ellyn, would you be interested in this price? Explain with supporting computations.
  3. 3. Suppose that Mouton & Perrier’s policy is that all internal transfers take place at full manufacturing cost. What would the transfer price be? Would the transfer take place?

1.

To determine

Identify the minimum transfer price that Division G would be willing to accept, identify the maximum transfer price that the Division BW would be willing to pay. Identify whether the internal transfer takes place or not, if yes compute the benefit or loss to the firm as a whole.

Explanation of Solution

Transfer price: It is a price charged on the goods manufactured by the one division and transferred to another division.

Minimum transfer price: It is the absolute lowest price that the selling division will accept.

Maximum transfer price: It is the absolute highest price that the buying division will accept.

As there is a market price, the maximum transfer price would be $2.95 that the Division BW would be willing to pay.

As the variable cost are given $1.25, and the selling cost would be avoided in case of internal transfer. Therefore, the minimum transfer price that Division G would be willing to accept is $1.13($1.25$0.12).

Yes, the internal transfer should take place.

Compute the benefit or loss to the firm as a whole:

ParticularsAmount ($)
Maximum price (A)$2

2.

To determine

Identify whether the Person E is interested in the change in the transfer price 2.40. Support the decision with calculations.

3.

To determine

In case, the internal transfer takes place at full manufacturing cost, identify the transfer price would be and whether the transfer is takes place or not.

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Chapter 10 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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