Trevorco:

1) Contribution Format Income Statement for the Month

Brownie Division Brownie Sundae Trevor Co.
Division
Units 3000 800
Sales 6000 3200 9200
- VC 1500 600 2100
Purchase cost of - 1600 1600
brownie ($2)
CM 4500 1000 5500
- FC 300 500 800
NI 4200 500 4700

2) We can see that Brownie Division Capacity Is 4000 brownies/month But it only
sells 3,000 per month 19 It has spare capacity of 1000 brownies per month. The
Demand for brownie Sundae department is
20 only 800 brownies currently, which it can easily fulfill with its spare capacity
only incurring Variable costs 21 therefore the Lowest transfer Price is $0.50 per
brownie if transfer is made to Brownie sundae Division about Meishan. His bonus
is associated with segment income, so if we would want to transfer Brownie at a
price which brownie department sells to outside market.
Therefore the Highest Price charged Should be $2 per brownie

3) If transfer at lowest price $0.5 per brownie

Brownie Div 3000 outside and 800 to Sunday div = 3800
Brownie Division Brownie Sundae Trevor Co.
Division
Units 3800 800
3000*2+800*.5
Sales 6400 3200 9600
- VC 1900 600 2500
TP of brownie .5 - 400 400
CM 4500 2200 6700
 - FC 300 500 800
NI 4200 1700 5900

If transfer at highest price $2 per brownie

Brownie Division Brownie Sundae Trevor Co.

Division
Units 3800 800
3000*2+800*2
Sales 7600 3200 10800
- VC 1900 600 2500
TP of brownie 2 - 1600 1600
CM 5700 1000 6700
- FC 300 500 800
NI 5400 500 5900

4) As Trevor Company has spare capacity, then why does rotesh has to buy 106
Brownies form outside, when it can Make its own brownies at a lesser cost.
Trevor Company Can encourage Rotesh by providing Incentives or bonus which
will be linked to successfully implement the Transfer Pricing mechanism and
agree to Buy from Meishan
5) If I were Trevor, I would suggest a Transfer Price of $0.50 because
Firstly, The Brownie Division Has Spare capacity of 1000 brownies, so it can
make extra 800 brownies without losing any contribution. Second, a price of $2
will not be feasible for both managers as if this price is implemented rotesh would
not be happy as his segment income will be less and hence his bonus will be
less in comparison to Meishan so the congruence of goal i.e what is best for the
business will not be achieved. Therefore Transfer Price of $0.50 per brownie is
best as a whole for trevor Co.