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General transfer pricing rule, maximum amount willing to pay as transfer price.
Fragrance, Inc. has two divisions-the Cologne Division and the Bottle Division. The company is decentralized, and each division is evaluated as a profit center. The Bottle Division produces bottles which can be used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00, and shipping costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external market for $2.50.
1. The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the Cologne Division. Use the general transfer pricing rule to compute the transfer price from the Bottle Division to the Cologne Division.
a. $2.00
b. $2.10
c. $2.50
d. $2.90
e. $3.00
2. Assume the Bottle Division has no excess capacity and could sell everything produced externally. Use the general rule to compute the transfer price from the Bottle Division to the Cologne Division.
3. What is the maximum amount the Cologne Division would be willing to pay for the bottles?
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