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Homework answers / question archive / Jefferson Company has two divisions: Jefferson Bottles and Jefferson Juice
Jefferson Company has two divisions: Jefferson Bottles and Jefferson Juice. Jefferson Bottles makes glass containers, which it sells to Jefferson Juice and other companies. It has a capacity of 10 million bottles a year. Jefferson Juice currently has a capacity of 3 million bottles per year. Jefferson Bottles has a fixed cost of $100,000 per year and a variable cost of $0.10/bottle. Jefferson Bottles can currently sell all of its output at $0.15/bottle.
a. What should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions make appropriate decentralized planning decisions?
b. If Jefferson Bottles can sell only 5 million bottles to outside buyers,
What should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions make appropriate decentralized planning decisions?
PFA
a. What should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions make appropriate decentralized planning decisions?
First, we need to find the fixed cost per bottle as follows: -
$100,000/10,000,000 bottles = $0.01 per bottle
Total cost per bottle = variable cost per bottle + fixed cost per bottle
= $0.10 + $0.01
= $0.11
Jefferson Bottles should charge Jefferson Juice for bottles at $0.11/bottle.
b. If Jefferson Bottles can sell only 5 million bottles to outside buyers, what should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions make appropriate decentralized planning decisions?
First, we need to find the fixed cost per bottle as follows: -
$100,000/(5,000,000 bottles + 3,000,000 bottles) = $0.0125 per bottle
Total cost per bottle = variable cost per bottle + fixed cost per bottle
= $0.10 + $0.0125
= $0.1125
Jefferson Bottles should charge Jefferson Juice for bottles at $0.1125/bottle.
