Posted: April 24th, 2016

What is the appropriate transfer price?

Hawkeye enterprises runs a chain of drive in ice cream stands in Iowa. Managers of all stands are told to act as if they owned the stand and are judged on their profit performance. Hawkeye rented an ice cream machine for the summer for $3600.00 to supply its stands with ice cream. Hawkeye is not allowed to sell ice cream to other dealers because it cannot obtain a dairy licence. The manager of the ice cream machine charges the stands $4 per gallon. Operating figures for the machine as follows;

sales to the stands (16000 gallons at $4) $64000
variable costs, at $2.10 per gallon $33600
fixed costs
rental of machine $3600
other fixed costs $10000 $47200
operating margin $16800

The manager of the Coralville drive in, one of the hawkeye drive ins is seeking permission to sign a contract to buy ice cream from an outside supplier at $3.35 a gallon. The Coralville uses 4000 galons during the summer. Elizabeth chuk, controller of hawkeye, this request to you. you determine that the other fixed costs of operating the machine will decrease by $900 if purchased from outside supplier. Controller wants an analysis of the request in terms of overall company objectives and an explanation of the conclusion. What is the appropriate transfer price?

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