Reference no: EM132858900

Question - Blue OMO Inc manufactures specialty dessert and sells them to variety dessert stores in town. The company operates several divisions as decentralized entities. Two of them is the Pastry division and the Chilled dessert division. Divisional managers are encouraged to maximize ROI and EVA. Managers are essentially free to determine whether goods will be transferred internally and what will be the internal transfer prices.

The Pastry division purchases basic ingredient and processes them into variety of pastry. The Chilled dessert division purchases basic pastry and other ingredients and uses them to produce gourmet chilled dessert. The Pastry division is free to sell pastry to outside buyers, and the Chilled dessert division is free to purchase basic pastry from other sources. Currently, however, the Pastry division sells all of its output to the Chilled dessert division, and the Chilled dessert division does not purchase materials from outside suppliers.

The basic pastry is transferred from the Pastry division to the Chilled dessert division at 110% of full cost. The Pastry division purchases basic ingredient pastry for $4 per pound. The Pastry division uses 1.25 pounds of basic ingredient to produce one pound of pastry. The division's other variable costs equal $1.25 per pound of output, and fixed costs at a monthly production level of 20,000 pounds of pastry are $0.75 per pound. If the pastry is sold to the outside buyer the price is $7.70 per pound. During the most recent month, 20,000 pounds of pastry were transferred between the two divisions. The Pastry division's capacity is 25,000 pounds of output.

With the increase in demand for dessert, the Chilled dessert production division expects to use 22,000 pounds of pastry next month. Outside supplier, Boga Foods has offered to sell 2,000 pounds of pastry next month to the Chilled dessert division for $7.50 per pound. However, before making the decision to switch to the outside supplier, he decided to approach the Pastry manager to see if he wanted to offer an even better price. If not, then Chilled dessert division would buy from the outside supplier.

Required -

What do you think the advantages and disadvantages using ROI and EVA as company's based performance measurement? Based on the information, what type of responsibility center applied in Blue OMO Inc.?

Compute the current transfer price per pound of pastry from Pastry division to Chilled dessert division. Comparing this transfer price with offer price from Boga Foods, to whom do you think the Chilled dessert manager would purchase 2,000 pounds next month? Is this transfer price could create goal congruence for company? Explain your answer.

Compute the minimum and maximum transfer price considering the current situation for Pastry division and Chilled dessert division.

How do you think the Pastry Manager shoud react with the Chilled dessert manager request? What do you think the proposed transfer price should be? Is the external purchase in the best interest of Bue OMO Inc? Do you think your proposed transfer price policy creates goal congruence?

Boga Foods since market prices for pastry have always been much higher than $7.50 per pound. After further investigation by the pastry division manager, it is revealed that the $7.50 per pound price was a one-time-only offer made to the Chilled dessert division due to excess inventory at Boga Foods. Future orders would be priced at $8.00 per pound. How should Pastry manager respond to Chilled dessert's request for a lower transfer price? Explain your answer.