Reference no: EM132502272

Peanut butter company acquires a processing company that has a normal capacity of 4,000,000 pounds and sold 2,800,000 pounds last year at a price of $3.50 per pound. The purpose of the acquisition is to furnish peanuts for the peanut butter plant which needs 1,600,000 pounds of peanuts per year.

production costs per pound of the peanut-processing company are as follows:

direct materials 0.9

direct labour .52

variable overhead .22

fixed overhead at normal capacity .30

total: 1.94

questions:

Question A. Compute the annual gross profit for the peanut division using a transfer price of $3.50.

Question B. Compute the annual gross profit for the peanut division using a transfer price of $1.94

Question C. What transfer price(s) will lead the manager of the peanut division to act in a manner that will maximize company profits?