Reference no: EM132880072

Question - ABC Farm has two divisions, the Garden Division, and the Kitchen Division. The Garden Division grows apples for a variable cost of $6 per basket. Its sells apples to the Kitchen Division at a transfer price.

The Kitchen Division bakes pies with the apples, and it sells these apple pies to outside customers for $2.00 per pie. It takes one basket of apples to make 10 pies.

The Kitchen Division has variable manufacturing costs of $0.4 per pie in addition to the costs from the Garden Division.

The transfer price is set at variable cost plus a mark-up, where the two divisions can equally share the contribution margin.

Suppose that the Kitchen Division receives a special order to supply a party with 1000 pies. Competitors offer to sell apple pies for $1.4 per pie.

Required -

1. Calculate the transfer price.

2. If the Kitchen Division sets pie price based on its divisional profit, will the Kitchen Division propose a price lower than the competitors?

3. If the pie price is set by the ABC farm, will the pie price be lower than the competitor's price?

4. Use this case to comment on the Cost-based transfer pricing method (that is, setting transfer price at variable cost plus a mark-up).