09.07.2022 - 08:54

Jefferson Company has two divisions: Jefferson Bottles and Jefferson Juice. Jefferson Bottles makes glass containers, which it sells to Jefferson Juice and other companies. Jefferson Bottles has a capacity of 10 million bottles a year. Jefferson Juice c

Question:

Jefferson Company has two divisions: Jefferson Bottles and Jefferson Juice.

Jefferson Bottles makes glass containers, which it sells to Jefferson Juice and other companies. Jefferson Bottles has a capacity of 10 million bottles a year. Jefferson Juice currently has a capacity of 3 million bottles of juice per year. Jefferson Bottles has a fixed cost of $100,000 per year and a variable cost of $0.01/bottle. Jefferson Bottles can currently sell all of its output at $0.03/bottle.

Required:

a. What should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions will make appropriate decentralized planning decisions?

b. If Jefferson Bottles can only sell 5 million bottles to outside buyers, what should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions will make appropriate decentralized planning decisions?

Answers (1)
  • Irene
    April 17, 2023 в 13:42
    a. To make appropriate decentralized planning decisions, Jefferson Bottles should charge Jefferson Juice $0.02/bottle for the glass containers. This will ensure that Jefferson Bottles covers its variable cost of $0.01/bottle, and generates a profit of $0.01/bottle. At the same time, Jefferson Juice will be able to purchase the bottles at a cost that allows it to produce and sell its juice at a competitive price. b. If Jefferson Bottles can only sell 5 million bottles to outside buyers, it should charge Jefferson Juice $0.03/bottle for the glass containers. This will ensure that Jefferson Bottles covers its full cost (fixed cost of $100,000 + variable cost of $0.02/bottle), and generate a profit of $0.01/bottle. Jefferson Juice will be willing to pay this price because it is still able to produce and sell its juice at a competitive price. However, if Jefferson Bottles were to charge more than $0.03/bottle, it would make it difficult for Jefferson Juice to compete in the market, while charging less than $0.03/bottle would mean that Jefferson Bottles would not be able to cover its full cost.
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