Figure 12-3Grey Inc. has many divisions that are evaluated on the basis of ROI. One division, Centra, makes boxes. A second division, Mantra, makes chocolates and needs 80,000 boxes per year. Centra incurs the following costs for one box:
$\begin{array}{ll}
\text { Direct materials } & \$ 0.35 \
\text { Direct labor } & \$ 0.60 \
\text { Variable overhead } & \$ 0.40 \
\text { Fixed overhead } & \$ 0.13 \
\text { Total } & \$ 1.48
\end{array}$ Centra has capacity to make 700,000 boxes per year. Mantra currently buys its boxes from an outside supplier for $1.80 each (the same price that Centra receives).
-Refer to Figure 12-3. Assume that Grey Inc. allows division managers to negotiate transfer price. Centra is producing 600,000 boxes. If Centra and Mantra agree to transfer boxes, what is the ceiling of the bargaining range and which division sets it?
A) $1.48; Centra
B) $1.35; Centra
C) $1.80; Mantra
D) $1.35; Mantra
E) $1.80; Centra

Question

Figure 12-3Grey Inc. has many divisions that are evaluated on the basis of ROI. One division, Centra, makes boxes. A second division, Mantra, makes chocolates and needs 80,000 boxes per year. Centra incurs the following costs for one box:
 $\begin{array}{ll}
\text { Direct materials } & \$ 0.35 \
\text { Direct labor } & \$ 0.60 \
\text { Variable overhead } & \$ 0.40 \
\text { Fixed overhead } & \$ 0.13 \
\text { Total } & \$ 1.48
\end{array}$ Centra has capacity to make 700,000 boxes per year. Mantra currently buys its boxes from an outside supplier for $1.80 each (the same price that Centra receives).
-Refer to Figure 12-3. Assume that Grey Inc. allows division managers to negotiate transfer price. Centra is producing 600,000 boxes. If Centra and Mantra agree to transfer boxes, what is the ceiling of the bargaining range and which division sets it?
A) $1.48; Centra
B) $1.35; Centra
C) $1.80; Mantra
D) $1.35; Mantra
E) $1.80; Centra

Quizplus · Accepted Answer

The ceiling of the bargaining range is set by the maximum price the buying division (Mantra) is willing to pay, which is the current external purchase price of $1.80. Mantra sets this ceiling because it represents their current cost, and they would not be willing to pay more than this to purchase internally.

Figure 12-3Grey Inc Centra Has Capacity to Make 700,000 Boxes Per Year