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# Question : 5-3:Transfer Prices and Capacity Jefferson Company has two divisions: Jefferson Bottles

5-3:Transfer Prices and Capacity

Jefferson Company has two divisions: Jefferson Bottles and Jefferson Juice.  Jefferson Bottles makes glass containers, which it sells to Jefferson Juice and other companies.  Jefferson Bottles has a capacity of 10 million bottles a year. Jefferson Juice currently has a capacity of 3 million bottles of juice per year.  Jefferson Bottles has a fixed cost of \$100,000 per year and a variable cost of \$0.01/bottle.  Jefferson Bottles can currently sell all of its output at \$0.03/bottle.

Required:

a.  What should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions will make appropriate decentralized planning decisions?

b.  If Jefferson Bottles can only sell 5 million bottles to outside buyers, what should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions will make appropriate decentralized planning decisions?

5-4:Transfer Prices and Divisional Profit

A chair manufacturer has two divisions:  framing and upholstering.  The framing costs are \$100 per chair and the upholstering costs are \$200 per chair.  The company makes 5,000 chairs each year, which are sold for \$500.

Required:

a.  What is the profit of each division if the transfer price is \$150?

b.  What is the profit of each division if the transfer price is \$200?

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