Reference no: EM132698045

XMAS Ltd.. is a manufacturer of seasonal deserts. Two of the firm's departments include the candy cane and ginger bread house departments.
The Ginger bread department requires Candy Canes for the Mega House which sells for $9. Each Mega House requires 100 candy canes, beyond supplying the Ginger Bread department, the Candy Canes department also sell Candy Canes to external customers. The market price for the protein powder is $2 for 100

                                 Candy Cane Dept. (for 100 units)               Ginger Bread House Dept.
Direct Material Cost           $ 1.00                                                     $ 4.10 (excludes cost of Candy Canes)
Direct Labour Cost              $ 0.10                                                $ 0.50
Variable Overhead Cost         $ 0.15                                                  $ 0.75
Fixed Overhead Cost           $ 0.15                                                   $ 0.25
Total Manufacturing Cost         $ 1.40                                             $ 5.60

Question 1. Outline a weakness and a strength from using transfer prices based on cost-plus pricing. Identify an alternative method of transfer pricing that is more effective than cost-plus pricing

Question 2. Assuming the transfer price was set from negotiation and was $1.10 for 100 Candy Canes. How might this have occurred and outline a potential risk from using this price