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What is the minimum transfer price

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Reference no: EM133062977

Question - Cindy Lou, Inc. operates a chain of family restaurants. Cindy Lou recently accquired a company that can produce the sweatshirts (among other gift products). Due to the acquisition, the company will now have a Restaurant Division and a Gift Division.

The Restaurant Division sells company-branded sweatshirts in their gift shops for $25.00 each.

They had been purchasing 5,000 sweatshirts per year from an outside supplier for $12.50 each.

The Gift Division currently has a capacity of 30,000 sweatshirts per year.

The Division currently sells 20,000 sweatshirts to outside companies for $12.00 each.

The full cost of each sweatshirt is $9.00, but the variable cost is $7.50 each.

The Restaurant Division will now purchase 5,000 sweatshirts per year from the Gift Division.

The company policy is that all transfer prices are negotiated by the divisions involved.

Required -

1) What is the maximum transfer price? Which division sets it?

2) What is the minimum transfer price? Which division sets it?

3) Suppose that the two divisions agree on a transfer price of $10.00.

What is the benefit for the Restaurant Division?

For the Gift Division?

For Cindy Lou, Inc. as a whole?

Reference no: EM133062977

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