Problem:
Le'Fleur has two divisions: the Parfume Division and the Bottle Division. The Bottle Division produces containers that can be used by the Parfume Division. The Bottle Division's variable manufacturing cost is $1.80, shipping cost is $0.10 and the external sales price is $2.80. No shipping costs are incurred on sales to the Parfume Division and the parfume Division can purchase similar containers in the external market for $2.40.
Q1. The Bottle Division has sufficient capacity to meet all external demands in addition to meeting the demands of the Parfume Division. Using the general rule, the transfer price from the Bottle Division to the Parfume Division would be:
Q2. Assume the Bottle Division has NO excess capacity and could sell everything it produced externally. The transfer price from the Bottle Division to the Parfume Division would be: