Montana Oversees the Coffee Bean Division at the Java Corp

Essay

Montana oversees the Coffee Bean Division at the Java Corp., and she is evaluating different options for the sale of their beans. In the past, the Coffee Bean Division has been selling to external customers only, and has been operating at full capacity. As the business grew and expanded, so did their production capacity. They are now operating with some idle capacity, and they have been debating whether to sell internally to another Business Unit. The Coffee Maker Division has recently decided that they will be giving away a free pound of coffee with each brewer machine purchase. They anticipate needing 12,500 pounds of coffee in the coming year and are obtaining quotes both internally and externally. The Coffee Bean Division has a capacity of 175,000 pounds of coffee and reported the following for their external sales: 160,000 pounds resulting in sales of $200,000, Variable Costs of $126,400, and Fixed Costs of $51,980. An external vendor has offered the Coffee Maker Division the following prices: $1.40 for the first 5,000 pounds, $1.20 for the next 5,000 pounds, $1.00 for any number of pounds above this, with an additional markup of 5% of the total. The Coffee Maker Division is evaluating their choices, and Montana is hopeful they will have the most appealing offer.
a. What is the minimum acceptable transfer price for their internal purchase from the Coffee Bean Division? What is the overall price that would be quoted?
b. What is the overall price offered by the external supplier to the Coffee Maker Division?
c. Which offer should the Coffee Maker Division pursue? Are there any additional avenues they could pursue if they would prefer to go with the alternate vendor?