Question

Assume the information as shown with respect to Imperial Beverages and Pizza Maven (both companies are owned by Harris and Louder).

Imperial Beverages:
Ginger beer production capacity per month	12,000 barrels
Variable cost per barrel of ginger beer	$6 per barrel
Fixed costs per month	$60,000
Selling price of Imperial Beverages ginger beer on the outside market	$18 per barrel
Pizza Maven:
Purchase price of regular brand of ginger beer	$16 per barrel
Monthly consumption of ginger beer	3,000 barrels

Required (show your work for partial credits!):

1) If Imperial Beverages has sufficient idle capacity (5,000 barrels) to satisfy Pizza Maven’s demands (3,000 barrels) without sacrificing sales to other customers, what is the range of acceptable transfer price?

2) If Imperial Beverages has some idle capacity (2,000 barrels) and must sacrifice other customer orders (1,000 barrels) to meet Pizza Maven’s demands (3,000 barrels), what is the range of acceptable transfer price?

Answer 1

1) when there is idle capacity available the transfer price = variable costs

fixed costs are irrelevant as they remains same at all levels

=$6 per barrel for imperial beverages

Pizza maven would be ready to accept the transfer price which is equal or lower to the price it is paying to outside supplier = $16

Transfer price range:

2) Here there would be loss of profit from sale to regular customer

transfer price for imoerial beverages

=variable cost+loss of contribution margin

=$6 * 3,000 + ($18-$6)*1,000

=$30,000 /3000barrels

=$10 per barrel

Pizza maven would be ready to accept the transfer price which is equal or lower to the price it is paying to outside supplier = $16

Transfer price range

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