The bottle production department of Cold Springs has decided it would like to renegotiate its transfer price to Bottling now that it sees what advantages can be gained. Current transfer prices, market prices, and costs for the subunit are: 

Market selling price per bottle ................. $0.075

Internal transfer price ............................... $0.06

Unit variable cost ...................................... $0.03

Unit fixed cost .......................................... $0.015

Practical capacity in bottles ................... 5,000,000

During the coming year, Bottle Product ion plans on making 4,000,000 bottles that it will sell to the bottling department . Bottling currently plans to buy an additional 1,000,000 bottles externally at the market price of $0.075. Frank Pearson, head of Bottle Product ion, has approached Janet Nielson, head of Bottling with an offer of $0.07 per bottle to supply the additional output needed. This product ion would need to be done on overtime, adding $0.01 to the variable costs of product ion. Frank sees this as a tremendous improvement for Bottling and a win for the corporation. 

REQUIRED:

a. What is the minimum transfer price that Bottle Production would be willing to accept?

b. What is the maximum transfer price that Bottling would be willing to pay?

c. Should the internal transfer take place? What are the costs and benefits of this internal transfer for the corporation?

d. Suppose Janet knows that Bottle Production has idle capacity, so she wants to pay only $0.05 for the additional bottles. Should Frank be interested in the business at this price?

e. What if top management gets involved and decides to set everyone’s transfer prices at full manufacturing cost. Would this transfer of an additional 1,000,000 bottles take place under these conditions?