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    Transfer pricing for Hawkeye enterprises

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    Hawkeye enterprises runs a chain of drive in ice cream stands in Iowa. Managers of all stands are told to act as if they owned the stand and are judged on their profit performance. Hawkeye rented an ice cream machine for the summer for $3600.00 to supply its stands with ice cream. Hawkeye is not allowed to sell ice cream to other dealers because it cannot obtain a dairy licence. The manager of the ice cream machine charges the stands $4 per gallon. Operating figures for the machine as follows;

    sales to the stands (16000 gallons at $4) $64000
    variable costs, at $2.10 per gallon $33600
    fixed costs
    rental of machine $3600
    other fixed costs $10000 $47200
    operating margin $16800

    The manager of the Coralville drive in, one of the hawkeye drive ins is seeking permission to sign a contract to buy ice cream from an outside supplier at $3.35 a gallon. The Coralville uses 4000 galons during the summer. Elizabeth chuk, controller of hawkeye, this request to you. you determine that the other fixed costs of operating the machine will decrease by $900 if purchased from outside supplier. Controller wants an analysis of the request in terms of overall company objectives and an explanation of the conclusion. What is the appropriate transfer price?

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    Solution Preview

    Even though the ice cream machine "charges" $4.00, it doesn't cost $4.00 per gallon. It costs $2.10 per gallon. So, if Coralville stops by from the company's machine, the costs that cease are the $2.10 per gallon and the $900 in fixed costs that will go away. In the place of these savings will be the vendor's cost at $3.35 per gallon. So, using an outside vendor will actually cost the firm $4,100 more.

    Transfer pricing can be ...

    Solution Summary

    Your tutorial gives you three potential tactics for transfer pricing and an analysis of net impact to profits if the ingredients are purchased externally.