Smile Coffee, Ltd is a coffee bean processing company, which has two main divisions, namely the Production Division (producing roasted coffee beans) and the Cafe Division (selling coffee drinks). Currently, the Production Division sells its products to external parties. The sales and cost data of the Production Division are as follows:

Direct materials 130,000

Direct labor 11,000

Manufacturing overhead variable 21,000

Manufacturing overhead - fixed overhead 27,000,000

Variable selling expenses 6,000

Fixed selling and administrative expenses 17,000,000

Selling price 182,000

Current Production 250,000

Maximum Capacity 300,000

Cafe Division can buy the same roasted coffee beans from other suppliers in the market for 173,000 per kg. Next year, Cafe Division plans to purchase roasted coffee beans from Production Division, amounting to 10,000 kgs.

Required:

1. What is the lowest price (minimum transfer price) per kg that the Production Division should charge for the internal transfers of its goods?

2. What is the highest price (maximum transfer price) per kg that the Cafe Division should pay to the Production Division?

3. Henry, CEO Smile Coffee thinks that for internal transactions, the variable selling expenses are reduced by 30%, so the transfer price from the Production Division to the Cafe Division can be less than 173,000 per kg. Do you agree with Henry? Why. What would the best transfer price be? support your answers with the calculations!

4. If the CEO sets the transfer price of 169,000 instead of 173,000 (for 10,000 kgs), analyze:

1). the effect on each divisions total profit?

2). the effect on Smile Coffee overall profit/loss?