Task: Transfer Pricing, Decentralized vs. Centralized Organizational Architecture
Regent Company has two divisions: Regent Bottles and Regent Cola. Regent Bottles makes glass containers, which it sells to Regent Cola and other companies. Regent Bottles has a capacity of 10 million bottles a year. Regent Cola currently has a capacity of 3 million bottles of Cola per year. Regent Bottles has a fixed cost of $100,000 per year and a variable cost of $0.01/bottle. Regent Bottles can currently sell all of its output at $0.03/bottle.
Question 1. What should Regent Bottles charge Regent Cola for bottles so that both divisions will make appropriate decentralized planning decisions?
Question 2. If Regent Bottles can only sell 5 million bottles to outside buyers, what should Regent Bottles charge Regent Cola for bottles so that both divisions will make appropriate decentralized planning decisions?