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Better Food Company recently acquired an olive oil processing company

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Better Food Company recently acquired an olive oil processing company;Better Food Company recently acquired an olive oil processing company;that has an annual capacity of 2,000,000 liters, and that processed and sold;1,400,000 liters last year at a price of $4 per liter. The purpose of the;acquisition was to furnish oil for the Cooking Division. The Cooking;Division needs 800,000 liters of oil per year. It has been purchasing oil;from supplies at the market price. Production costs at capacity of the olive;oil company, now a division, are as follows;Direct materials per liter $ 1.00;Direct processing labor $ 0.50;Variable processing overhead $ 0.24;Fixed processing overhead $ 0.40;Total $ 2.14;Management is trying to decide what transfer price to use for sales from;the newly acquired company to the Cooking Division. The manager of the;Olive Oil Division argues that $4, the market price, is appropriate. The;manager of the Cooking Division argues that the cost of $2.14 should be;used, or perhaps a lower price, since fixed overhead cost should be;recomputed with the larger volume. Any output of the Olive Oil Division not;sold to the Cooking Division can be sold to outsiders for $4 per liter.;Required;a Compute the operating income for the Olive Oil Division using a;transfer price of $4.;b Compute the operating income for the Olive Oil Division using a;transfer price of $2.14.;c What transfer price(s) do you recommend? Compute the operating;income for the Olive Oil Division using your recommendation.

 

Paper#29312 | Written in 18-Jul-2015

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