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What is the appropriate transfer price

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Question - Hawkeye Enterprises runs a chain of drive-in ice cream stand in Iowa City during the summer season. Managers of all stands are told to act as if they owned the stand and are judged on their profit performance. Hawkeye Enterprises has rented an ice cream machine for the summer for $3,600 to supply its stands with ice cream. Hawkeye is not allowed to sell ice cream to other dealers b/c it cannot obtain a dairy license. The manager of the ice cream machine charges the stands $4 per gallon. Operating figures of the machine for the summer are as follows:

Sales to the stands (16,000 gallons at $4) = $64,000

Variable costs ($2.10 per gallon) = $33,600

Fixed costs:

Rental of machine = $3,600

Other fixed costs = $10,000

Operating margin = $16,800

The manager of the Coralville Drive-In, one of the Hawkeye Drive-ins, is seeking permission to sign a contract to buy ice cream from an outside supplier at $3.35 per gallon. The Coralville Drive-in uses 4,000 gallons of ice cream during the summer. Elizabeth Chuck, controller of Hawkeye, refers this request to you. You determine that the other fixed costs of operating the machine will decrease by $900 if the Coralville Drive-in purchases from an outside supplier. Chuk wants an analysis of the request in terms of overall company objectives and an explanation of your conclusion. What is the appropriate transfer price?

Reference no: EM131813737

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