Grammy Girl Products (GGP) has two divisions, Bones and Biscuits, both of which usually have independence in sourcing and pricing decisions. There is an unlimited supply of raw bones. Biscuits manufactures, amongst other items, a specialty product called BisBone. The BisBone formula requires 70% bone meal and 30% cereal per lbs, plus a dollop of meat flavoring. BisBone is usually sold in 20-lbs cases and processed bones in 5-lbs packs. Cost and sales pricing data appears below.

Question

In lieu of its normal processing, Bones sometimes grinds raw bones into bone meal (grinding costs $.05 per lbs) When bone meal is sold to Biscuits, bulk packaging is used which costs $1 per 100 lbs sack; when sold to other firms, it is packed in 50lbs containers, costing $3 each. Bones prices the container product at $180. Biscuits just received an order for 800 cases of one of its specialty products, BisBone, and is contemplating purchasing bone meal from its sister division.



Should Biscuits buy bone meal from Bones at the price calculated in Q5-9?



A. Yes, because it is $0.55 per lb cheaper than its external supplier's

B. No, because it is $0.55 per lb more costly than its external supplier's

C. Yes, because it is $0.025 per lb cheaper than its external supplier's

D. No, because it is $0.60 per lb more costly than its external supplier's

E. None of the above

Answer 1

B. No, because it is $0.55 per lb more costly than its external supplier's
No. Biscuit's transfer price from Q5-9 is $3.55 per lb. However, Biscuit can buy from an outside supplier for $3 per lb.