Question

Perfumes Ltd has two divisions: the Perfume Division and the Bottle Division. The company is decentralized 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 manufacturing cost per unit is $3.00 and shipping costs are $0.20 per unit. The Bottle Division's external sales 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 the Perfume Division would be willing to pay for the bottles?

d) When is it more appropriate to use a market-based transfer price rather than a cost-based transfer price? (1 mark)

Answer 1