Monona produces bottled water. The company recently purchased Cabot Co., a manufacturer of plastic bottles. In the past, Monona has purchased plastic bottles on the open market at $0.20 each. Financial information for the past year for Monona and Cabot follows:
Cabot has a production capacity of 2 million units.
1. Determine how much Monona will save on each bottle if it obtains them from Cabot instead of an external supplier.
2. Determine the maximum and minimum transfer prices for the plastic bottles. Who sets these?
3. Suppose Monona has determined a transfer price rule of variable cost plus 50 percent for all related-party transactions. Determine how much each party will benefit from the internal transfer.
4. Determine the mutually beneficial transfer price.