Transfer pricing, perfect and imperfect markets. Letang Company has three divisions (R, S, and T), organized as decentralized profit centers. Division R produces the basic chemical Ranbax, in multiples of 1,000 pounds, and transfers it to divisions S and T. Division S processes Ranbax into the final product Syntex, and division T processes Ranbax into the final product Termix. No material is lost during processing. Division R has no fixed costs. The variable cost per pound of Ranbax is $0.18. Division R has a capacity limit of 10,000 pounds. Divisions S and T have capacity limits of 4,000 and 6,000 pounds, respectively. Divi- sions S and T sell their final product in separate markets. The company keeps no inventories of any kind. The cumulative net revenues (i.e., total revenues – total processing costs) for divisions S and T at vari- ous output levels are summarized below. Division S Pounds of Ranbax processed in S Total net revenues ($) from sale of Syntex 4,000 $1,100 $1,200 1,000 2,000 3,000 $ 500 $ 850 Division T Pounds of Ranbax processed in T Total net revenues ($) from sale of Termix $600 6,000 $2,350 1,000 2,000 3,000 4,000 $1,800 $2,100 $2,250 5,000 $1,200
Transfer pricing, perfect and imperfect markets. Letang Company has three divisions (R, S, and T), organized as decentralized profit centers. Division R produces the basic chemical Ranbax, in multiples of 1,000 pounds, and transfers it to divisions S and T. Division S processes Ranbax into the final product Syntex, and division T processes Ranbax into the final product Termix. No material is lost during processing. Division R has no fixed costs. The variable cost per pound of Ranbax is $0.18. Division R has a capacity limit of 10,000 pounds. Divisions S and T have capacity limits of 4,000 and 6,000 pounds, respectively. Divi- sions S and T sell their final product in separate markets. The company keeps no inventories of any kind. The cumulative net revenues (i.e., total revenues – total processing costs) for divisions S and T at vari- ous output levels are summarized below. Division S Pounds of Ranbax processed in S Total net revenues ($) from sale of Syntex 4,000 $1,100 $1,200 1,000 2,000 3,000 $ 500 $ 850 Division T Pounds of Ranbax processed in T Total net revenues ($) from sale of Termix $600 6,000 $2,350 1,000 2,000 3,000 4,000 $1,800 $2,100 $2,250 5,000 $1,200
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Suppose there is no external market for Ranbax. What quantity of Ranbax should the Letang Company produce to maximize overall income? How should this quantity be allocated between the two processing divisions?
Transcribed Image Text:Transfer pricing, perfect and imperfect markets. Letang Company has three divisions (R, S, and
T), organized as decentralized profit centers. Division R produces the basic chemical Ranbax, in multiples
of 1,000 pounds, and transfers it to divisions S and T. Division S processes Ranbax into the final product
Syntex, and division T processes Ranbax into the final product Termix. No material is lost during processing.
Division R has no fixed costs. The variable cost per pound of Ranbax is $0.18. Division R has a capacity
limit of 10,000 pounds. Divisions S and T have capacity limits of 4,000 and 6,000 pounds, respectively. Divi-
sions S and T sell their final product in separate markets. The company keeps no inventories of any kind.
The cumulative net revenues (i.e., total revenues – total processing costs) for divisions S and T at vari-
ous output levels are summarized below.
Division S
Pounds of Ranbax processed in S
Total net revenues ($) from sale of Syntex
4,000
$1,100 $1,200
1,000
2,000
3,000
$ 500
$ 850
Division T
Pounds of Ranbax processed in T
Total net revenues ($) from sale of Termix $600
6,000
$2,350
1,000
2,000
3,000 4,000
$1,800 $2,100 $2,250
5,000
$1,200
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