Caffeine Connections sells a variety of exotic teas and coffees through a national network. The...

Caffeine Connections sells a variety of exotic teas and coffees through a national network. The company operates its own roasting division, which supplies roasted coffee beans to its own wholesale division as well as to other external customers. Even though the roasting division can roast 500,000 pounds of beans each month, current market demand is only 425,000 pounds, so that is the current level of production. The wholesale division has designed a new promotional product for which it needs 50,000 pounds of roasted coffee beans. The roasting division can supply the beans at a cost of $6.75 per pound. Of that cost, $5 per pound is variable and $1.75 is fixed. The beans could also be purchased from another roaster at $8 per pound. Both the roasting and wholesale divisions are treated as profit centers.

Required

a. If Caffeine Connections chooses to use a cost-based transfer price for the beans, what transfer price would the two divisions use? Is the transfer likely to occur? Why or why not?

b. If Caffeine Connections chooses to use a cost-plus-based transfer price for the beans, what transfer price would the two divisions use, assuming a 25% markup? Is the transfer likely to occur? Why or why not?

c. If Caffeine Connections chooses to use a market-based transfer price for the beans, what transfer price would the two divisions use? Is the transfer likely to occur? Why or why not?

d. What is the minimum transfer price for the beans?

e. What is the likely range of a negotiated transfer price?

f. If the roasting division currently roasts and sells 500,000 pounds of coffee to external customers, what is the minimum transfer price?