An Ice Cream Outlet That Is Part of a Regional

question 2

Essay

An ice cream outlet that is part of a regional chain has begun purchasing its ingredients from an outside supplier instead of purchasing from the chain. The products from the outside supplier are cheaper, although the quality is not as high. The transfer price for the products is based on the market price, even though the actual costs that the chain incurs are much lower than the market price. Explain why the outsourcing decision is considered suboptimal. What type of transfer price policy would help to avoid this problem?

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Definitions:

Demand Curves

Graphical representations showing the relationship between the quantity of goods consumers are willing and able to purchase at various prices, typically downward sloping from left to right.

Own Price Elasticity

A measure of how much the quantity demanded of a good responds to a change in the price of that good, holding all else constant.

Specific Tax

A tax that is levied as a fixed amount per unit of a good or service, rather than a percentage of the price.

Elasticity of Supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good, indicating the flexibility of producers.