H2'Oh! produces bottled water. The company recently purchased PlastiCo., a manufacturer of plastic bottles. In the past, H2'Oh! has purchased plastic bottles on the open market at \($0.25\) each. Financial information for the past year for H2-Oh! and PlastiCo. follows:

PlastiCo has a production capacity of 2 million units.

Required:

1. Determine how much H2'Oh! will save on each bottle if it obtains them from PlastiCo. instead of an external supplier.

2. Determine the maximum and minimum transfer prices for the plastic bottles. Who sets these?

3. Suppose H2-Oh! has determined a transfer price rule of variable cost plus 40 percent for all related'party transactions. Determine how much each party will benefit from the internal transfer.

4. Determine the mutually beneficial transfer price.

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H2-Oh! PlastiCo. Sales 500,000 units X $2.00 each 1,200,000 units x $0.25 each $1,000,000 $300,000 Variable expenses 500,000 units x $0.25 each 125,000 1,200,000 units X $0.05 each 60,000