Reference no: EM132516667

Spicy Red Pty Ltd has two divisions: Chilii Division (that farms chilies) and Sauce Division (that makes chilli sauce). Spicy Red requires that all transfers between divisions be recorded at variable cost as a transfer price. Divisional managers choose their sources of customers and suppliers.

The capacity for the Chilli Division is 250,000kg of chillies per month. Chilli Division sells 40% of its chillies to the Sauce Division, while the remainder of the sales are to external customers. The monthly budget information for the Chilli Division, based on full capacity, is presented below.

                                           Sauce Division                External Sales                 Total
Kilograms of chillies sold     100, 000                     150, 000                  250, 000

Sales ($)                          10, 000                        22, 500                  32, 500

Variable costs {$)              10,000                          15,000                   25,000

Fixed costs ($)                     2,000                         6,000                     8, 000

Chilli Division receives a special offer from a new customer for 84,000 kgs of chilies at a special price of $0.28 per kg. If the special offer were accepted, Chilli Division would be unable to supply those units to the Sauce Division. The Sauce Division could purchase chilies from an external supplier for the price of $0.35per kg.

Questions:

Question 1: Assuming the Chilli Division manager agrees to the special order, calculate the effect of the decision on the profit of Spicy Red as a whole.

Question 2: Calculate the total opportunity cost Chilli Division will incur if they meet the internal demand from Sauce Division.

Question 3: Calculate the transfer price of 1kg of chilli using the general transfer-pricing formula.