Grammy Girl Products (GGP) Has Two Divisions, Bones and Biscuits

question 26

Multiple Choice

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. $$\begin{array} { | l | r | r | } \hline & \text { BisBone } & \text { Bones } \\\hline \text { Sales price, per case (pack) } & \$ 100.00 & \$ 20.00 \\\hline \text { Raw bones, per lbs } & & \$ 1.50 \\\hline \text { Bone meal, per lbs (external seller) } & \$ 3.00 & \\\hline \text { Cereals, per lbs } & \$ 0.50 & \\\hline \text { Meat flavoring, per case } & \$ 3.00 & \\\hline \text { Processing. per lbs } & \$ 1.00 & \$ 0.80 \\\hline \text { Packaging. per case (pack) } & \$ 1.25 & \$ 0.75 \\\hline \text { Overheads, per case (pack) . 40\% fixed } & \$ 10.00 & \$ 7.00 \\\hline\end{array}$$ 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 GGP encourage an internal transaction for this order if Bones has outside customers for the bone meal, and, if so, at what price?

• A)No, because it will undermine the benefits of decentralization
• B)Yes, at $2.70 per lb
• C)No, because GGP will be worse off
• D)Yes, at the external market price of $3 per lb
• E)Yes, but at some other price

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