Incremental net revenues per pound
from processing next 1,000 pounds of
Ranbax in T
$0.60
$0.60
$0.60
$0.30
$0.15
$0.10
1. The variable cost per pound of Ranbax is $0.18. From the last row of Solution Exhibit 22–
37a, it is evident that for the first 3,000 pounds of Ranbax processed in S, the incremental net
revenue per pound exceeds $0.18. However, the next 1,000 pounds following that generate only
$0.10 per pound when converted to Syntex, which is below the variable cost of $0.18. Similarly,
from the last row of Solution Exhibit 22-37b, it is in Letang’s interest to transfer 4,000 pounds of
Ranbax to T to be processed into Termix.
Letang should therefore produce 7,000 pounds of Ranbax overall and send 3,000 pounds
to S and 4,000 pounds to T.
2. Division R will produce and ship Ranbax of any quantity up to its capacity of 10,000
pounds provided it gets a price not lower than its variable cost of $0.18 per pound.
From Solution Exhibit 22-37a, Division S will be motivated to acquire exactly 3,000
pounds of Ranbax if the transfer price lies between $0.10 and $0.25 per pound.
From Solution Exhibit 22-37b, Division T will be motivated to acquire exactly 4,000
pounds of Ranbax if the transfer price lies between $0.15 and $0.30 per pound.
The set of transfer prices that will induce all three divisions to implement the plan found
to be optimal in requirement 1 is given by the intersection of these three ranges. In other
words, the transfer price must lie between $0.18 and $0.25 per pound of Ranbax.
3. If R can sell any quantity of Ranbax in a competitive market for $0.33 per pound, Letang
will choose to have Ranbax processed further into Syntex or Termix only to the extent the
incremental net revenue per pound exceeds $0.33.
From Solution Exhibits 22-37a and 22-37b, Letang would therefore like to process 2,000
pounds of Ranbax into Syntex and 3,000 pounds of Ranbax into Termix.
Because the variable cost of producing Ranbax is $0.18 less than the market price of
$0.33, Letang will now choose to have Division R operate at capacity. The final 5,000 pounds of
Ranbax will then be sold in the external market.
