Transfer Pricing in the Presence of Divisional Interdependencies

question 6

Essay

Transfer Pricing in the Presence of Divisional Interdependencies
Prior to 1997,PepsiCo,a major soft drink company,had a restaurant division consisting of Kentucky Fried Chicken,Taco Bell,and Pizza Hut.The only cola beverage these restaurants served was Pepsi.Assume that the major reason PepsiCo owned fast food restaurants is an attempt to increase its share of the cola market.Under this assumption,some Pizza Hut patrons who order a cola at the restaurant and are told they are drinking a Pepsi will switch and become Pepsi drinkers instead of Coke drinkers on other purchase occasions.However,studies have shown that some customers refuse to eat at restaurants unless they can get a Coke.
PepsiCo sells Pepsi Cola to non-PepsiCo restaurants at $0.53 per gallon.This is the market price of Pepsi-Cola.Pepsi-Cola's variable manufacturing cost is $0.09 per gallon and its total (fixed and variable)manufacturing cost is $0.22 per gallon.PepsiCo produces Pepsi-Cola in numerous plants located around the world.Plant capacity can be added in small increments (e.g. ,a half-million gallons per year).The cost of additional capacity is approximately equal to the fixed costs per gallon of $0.13.
Required:
What transfer price should be set for Pepsi transferred from the soft drink division of PepsiCo to a PepsiCo restaurant such as Taco Bell? Justify your answer.

Distinguish between transformational and transactional leadership styles.

Comprehend how cultural dimensions influence leadership behavior and organizational practices.

Recognize the importance of diversity and synergy in leadership and organizational success.

Appreciate the impact of cultural values on leadership effectiveness and follower's acceptance.

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Definitions:

Equivalent Annual Annuity

A financial term referring to the annual cash flow from an investment over its lifespan, adjusted to reflect equal annual payments.

Cost of Capital

The target earnings rate that a company seeks on investments to preserve its value in the market and gather funds.

Mutually Exclusive

Decisions or projects that, if chosen, prevent the selection of one or more other options.

Present Value

The present value of a future amount of money or series of cash flows, adjusted for a certain return rate.