Reference no: EM132552849
The Quarantine Company has two divisions, ECQ and MECQ. Production manufactures pants, which it sells to both the Marketing Division and to the outside market under a different brand name. Marketing operates numerous pants stores, and it sells both Quarantine pants and other brands.
The following facts also pertain to Quarantine:
Sales price to retailers if sold by Production: P380 per pair
Variable Cost to produce: P190 per pair
Fixed Costs: P2,000,000 per month
Production is operating far below its capacity.
Sales price to customers if sold by Marketing: P500 per pair
Variable marketing costs: 5% of sales price
Marketing has decided to reduce the sales price of Quarantine pants. The company's variable manufacturing and marketing costs are differential to this decision, whereas fixed manufacturing and marketing costs are not.
Required:
Question a. What is the minimum price that can be charged for the pants and still cover differential manufacturing and marketing costs?
Question b. What is the appropriate transfer price for this decision?
Question c. What if the transfer price were set at P380? What effect would this have on the minimum price set by the marketing manager?
Question d. How would you answer to questions a and b change if the Production Division had been operating at full capacity?
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