Johnston chemical company manufactures a wide variety of industrial chemicals and adhesives. it purchases much of its raw material in bulk from other chemical companies. one chemical, t-bar, is prepared in one of johnston’s own plants. t-bar is shipped to other johnston plants at a specified internal price.

the johnston adhesive plant requires 10,000 barrels of t-bar per month and can purchase it from an outside supplier for $150 per barrel. johnston’s t-bar unit has a capacity of 20,000 barrels per month and is presently selling that amount to outside buyers at $165 per barrel. the difference between the t-bar unit’s price of $165 and the outside firm’s t-bar price of $150 is due to short-term pricing strategy only; the materials are equivalent in quality and functionality. the t-bar unit’s selling cost is $5 per barrel, and its variable cost of manufacturing is $90 per barrel.

for several years each unit of johnston chemical company had been judged independently on the basis of its profit and return on investment. top management had been working to gain effective results from a policy of decentralizing responsibility and authority for all decisions. however, goal congruence is also an important priority that the company is emphasizing.

diman fong , a fresh mba graduate from a renowned college was appointed as the manager of the adhesive plant unit and he is inexperience in the issue of transfer pricing and internal purchase. he came to you, as a management consultant for advice.

suggested considerations for case analysis:

before you elaborate his setback and provide him with guidance, the following questions you need to raise and obtain his answer so as to lead him to resolve the problem.

is there an outside supplier? if not, what happen to transfer price?

is the seller’s variable cost less than the market price?

is the selling unit operating at full capacity?

(a) with the figures provided above, work out some detail as reference to advise diman if his adhesive plant unit should purchase t-bar inside or outside the company? given that diman is new, his decision will likely start from the standpoint of the company as a whole.
(b) when negotiate with t-bar unit, what’s the most appropriate transfer price?
(c) if the t-bar unit had a capacity of 30,000 barrels per month to deal with both internal and external sales, what will the situation be?

The following transactions and events that occurred in the village of kowitt gorge during the calendar year 2019: 1. the village commissioners adopted the following budget: estimated revenues: property taxes $1,850,000 all other revenues 300,000 total revenues $2,150,000 appropriations: all departments other than police $1,000,000 police—salaries 600,000 police—fringe benefits 450,000 police—supplies 80,000 total appropriations $2,130,000 2. the village received, in cash, property taxes of $1,840,000 and all other revenues of $295,000. 3. the village made cash payments, charging the following appropriations: all departments other than police $1,000,000 police—salaries 595,000 police—fringe benefits 390,000 4. the administrator of fringe benefits received an invoice for police employee health insurance in the amount of $95,000, together with a letter from the insurance provider, explaining that the large increase was caused by a change in federal laws. the invoice could not be paid because the police—fringe benefits appropriation had a balance of only $60,000 (appropriation of $450,000 minus expenditures in item 3 of $390,000). as a result, the village commissioners amended the budget as follows: increase: appropriation for police—fringe benefits $35,000 decrease: appropriation for police—salaries 5,000 decrease: appropriation for police—supplies 25,000 use of fund balance 5,000 5. the village paid the invoice for $95,000, referred to in item 4 above, charging the appropriation for police—fringe benefits. 6. the police department placed po 2019a for firearms in the amount of $30,000 and po 2019b for uniforms in the amount of $20,000, all charged to the appropriation for police—supplies. (enter these pos as one transaction.) 7. after receiving po 2019a, the supplier notified the police department that a change in the design of the weapons would increase the cost to $32,000. the department sent the supplier an amended po, increasing it by $2,000. 8. the police department received the uniforms ordered on po 2019b, together with an invoice for $20,000. the department approved the invoice for payment. record the transactions and events applicable to the appropriations for police—fringe benefits and police—supplies in the following appropriations ledger. notes: use a negative sign with your answers if: 1. the amount entered in the appropriation column is a debit (dr.) rather than a credit (cr.); or 2. the amount entered in the expenditures column is a credit (cr.) rather than a debit ( in the available appropriation column, enter the appropriate balance after every transaction/event, even if a transaction isn't recorded in a particular ledger for that transaction. for transaction 6, enter both purchase orders (pos) as one combined transaction. appropriations ledger appropriation: police - fringe benefits appropriation encumbrances expenditures available transaction cr. dr. cr. dr. appropriation 1 answer 0 answer 0 answer 0 answer 0 answer 0 2 answer 0 answer 0 answer 0 answer 0 answer 0 3 answer 0 answer 0 answer 0 answer 0 answer 0 4 answer 0 answer 0 answer 0 answer 0 answer 0 5 answer 0 answer 0 answer 0 answer 0 answer 0 6 answer 0 answer 0 answer 0 answer 0 answer 0 7 answer 0 answer 0 answer 0 answer 0 answer 0 8 answer 0 answer 0 answer 0 answer 0 answer 0 appropriations ledger appropriation: police - supplies appropriation encumbrances expenditures available transaction cr. dr. cr. dr. appropriation 1 answer 0 answer 0 answer 0 answer 0 answer 0 2 answer 0 answer 0 answer 0 answer 0 answer 0 3 answer 0 answer 0 answer 0 answer 0 answer 0 4 answer 0 answer 0 answer 0 answer 0 answer 0 5 answer 0 answer 0 answer 0 answer 0 answer 0 6 answer 0 answer 0 answer 0 answer 0 answer 0 7 answer 0 answer 0 answer 0 answer 0 answer 0 8 answer 0 answer 0 answer 0 answer 0 answer 0 answer 0 answer 0 answer 0 answer 0 answer 0