The Fruity Bakers specialize in making delicious cakes. Their trademark fruit cake is made in Division X (the supplying division) and sold to external customers for them to decorate, or it can be enjoyed plain. It is also transferred to Division Y (the receiving division) where it is iced and decorated to be sold as a luxury wedding cake. Fruity Bakers are currently trying to decide what the optimum price to sell the cakes from Division X to Y should be in order to motivate the managers of both divisions. The following data shows the costs incurred by Division X to make a fruit cake and by Division Y to ice and decorate the wedding cake: $/unit Division X Variable costs 22 Fixed overhead 9. 31 Division Y Variable costs 33 Fixed overhead 8. 41 Plain fruit cakes can be sold and purchased extermally for $35. Wedding cakes can be sold for $80. Instructions: 1. Should the company make the fruit cakes internally or buy them in? 2. What non-financial factors should also be taken into consideration? 3. What would be the implication of using the following transfer pricing policies? a. Variable cost plus 30% b. Variable cost only c. The external market price d. Full cost plus 5%
The Fruity Bakers specialize in making delicious cakes. Their trademark fruit cake is made in Division X (the supplying division) and sold to external customers for them to decorate, or it can be enjoyed plain. It is also transferred to Division Y (the receiving division) where it is iced and decorated to be sold as a luxury wedding cake. Fruity Bakers are currently trying to decide what the optimum price to sell the cakes from Division X to Y should be in order to motivate the managers of both divisions. The following data shows the costs incurred by Division X to make a fruit cake and by Division Y to ice and decorate the wedding cake: $/unit Division X Variable costs 22 Fixed overhead 9. 31 Division Y Variable costs 33 Fixed overhead 8. 41 Plain fruit cakes can be sold and purchased extermally for $35. Wedding cakes can be sold for $80. Instructions: 1. Should the company make the fruit cakes internally or buy them in? 2. What non-financial factors should also be taken into consideration? 3. What would be the implication of using the following transfer pricing policies? a. Variable cost plus 30% b. Variable cost only c. The external market price d. Full cost plus 5%
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing
Section: Chapter Questions
Problem 15E: Mossfort, Inc., has a division in Canada that makes long-lasting exterior wood stain. Mossfort has...
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