Big Al’s Pizza Emporium, a subsidiary of Big Al’s Pizza, Inc., has decided to sell frozen pizzas in its restaurants. Restaurant customers will take these pizzas home and cook them. The restaurants will sell frozen meat pizzas for $10 and frozen veggie pizzas for $11.50. Although the restaurants would like to purchase the pizzas from Big Al’s Pizza, Inc., Big Al’s Pizza Emporium has found an unrelated supplier that will provide the meat pizzas for $4.55 and veggie pizzas for $5.75. Assume that Big Al’s Pizza, Inc. has excess capacity and can supply the frozen pizzas to Big Al’s Pizza Emporium without impacting current sales.
Required:
A. Using estimated cost data for year 3, given in Part Eight (question A), at what minimum price should Big Al’s Pizza, Inc. agree to transfer meat and veggie pizzas to Big Al’s Pizza Emporium?
B. What is the maximum price that Big Al’s Pizza Emporium should pay Big Al’s Pizza, Inc. for the pizzas?
C. If Big Al’s Pizza Emporium purchases pizzas from Big Al’s Pizza, Inc., what is the ideal transfer price? Why?
D. Should Big Al’s Pizza Emporium buys pizzas from Big Al’s Pizza, Inc... What qualitative factors should be considered in making this decision?
E. What should the transfer price be if Big Al’s Pizza, Inc. is at full capacity?