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
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Question
Suppose that division R can sell any quantity of Ranbax in a
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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