Courtland Company has a decentralized organization with a divisional structure. Each divisional manager is evaluated on the basis of ROI.
The Plastics Division produces a plastic container that the Chemical Division can use. Plastics can produce up to 100,000 of these containers per year. The variable costs of manufacturing the plastic containers are $4.50. The Chemical Division labels the plastic containers and uses them to store an important industrial chemical, which is sold to outside customers for $50 per container. The division’s capacity is 20,000 units. The variable costs of processing the chemical (in addition to the cost of the container itself) are $26.
REQUIRED
(Assume each requirement is independent, unless otherwise indicated.)
1. Assume that all of the plastic containers produced can be sold to external customers for $12 each. The Chemical Division wants to buy 20,000 containers per year. What should the transfer price be? Briefly explain. (2 marks)
2. Refer to Requirement 1. Assume $2 of avoidable distribution costs if sold internally. Identify the maximum and minimum transfer prices. Identify the actual transfer price, assuming that negotiation evenly splits the sum of the maximum and minimum transfer prices.
any answer plis
To determine the transfer price in Requirement 1, we need to consider the variable cost of manufacturing the plastic containers and the selling price to external customers.
The variable cost of manufacturing the plastic containers is given as $4.50 per unit. Since the Plastics Division has the capacity to produce up to 100,000 containers per year, and the Chemical Division wants to buy 20,000 containers per year, we don't have any constraints in terms of production capacity.
Next, we need to consider the selling price to external customers. The question states that the plastic containers can be sold to external customers for $12 each. However, in this case, the Chemical Division wants to purchase all 20,000 containers internally, meaning that they will not be available for sale to external customers. As a result, we cannot use the $12 selling price as the transfer price.
Instead, we need to consider the variable costs of the Chemical Division in processing the chemical. The question states that the variable costs of processing the chemical (in addition to the cost of the container itself) are $26. Since the Chemical Division wants to purchase 20,000 containers, we can calculate the total variable costs of processing the chemical as follows: 20,000 x $26 = $520,000.
Therefore, the transfer price should be set at least equal to the variable costs of manufacturing the plastic containers ($4.50 x 20,000 = $90,000) plus the variable costs of processing the chemical ($520,000). So, the minimum transfer price should be $90,000 + $520,000 = $610,000.
However, there is no maximum transfer price because it is not mentioned in the question. We only have the minimum transfer price.
Moving on to Requirement 2, which introduces avoidable distribution costs of $2 if the containers are sold internally. This means that if the containers are sold internally, an additional $2 per container of distribution costs must be incurred. We can consider this as an additional cost that needs to be added to the minimum transfer price.
To calculate the maximum transfer price, we need to consider the additional cost of avoidable distribution costs for 20,000 containers: $2 x 20,000 = $40,000. So, the maximum transfer price would be the minimum transfer price ($610,000) plus the additional distribution costs ($40,000), which equals $650,000.
To find the actual transfer price if negotiation evenly splits the sum of the maximum and minimum transfer prices, we add the maximum and minimum transfer prices together and divide by 2: ($650,000 + $610,000) / 2 = $630,000. Therefore, the actual transfer price, in this case, would be $630,000.