Week III Case Study. Incremental Cashflows to Celtex

WEEK III CASE STUDY
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Week III Case Study
1 Incremental Cashflows to Celtex
Chemical Q47 is one of the key ingredients to produce consumer products required by consumer product division. The division has two options to buy Q47 in-house from Synchem or purchase it from external supplier Meas Chemicals.
Cost to Synchem to produce chemical Q47:
Cost of Q47 to Synchem Division

 

$ per Gallon

Organic Chemicals

1.00

Mixing Q4 with Q47 cost

1.75

Fixed Manufacturing Expense

0.30

Total Cost

3.05

Table 1: Cost to produce Q47 chemical
Price quoted by Synchem division and Meas Chemical for Q47 chemical to Consumer Product division (Zimmerman, 2014).
Price for Q47 Chemical to Consumer Products Division

 

$ per Gallon

Synchem Division (In-House)

3.20

Meas Chemicals (Outside)

3.00

Table 2: Pricing
Option 1: Obtaining Q47 in-house from Synchem
If the consumer products obtain chemical Q47 from Synchem’s division, then Celtex cash flow will be affected. The material transferred between divisions will give profit to one division and cost to another with the same amount overall, as a whole company will not gain anything from this transfer pricing. However, individually, in this case, consumer product division profit will be affected by $ 0.2 per Gallon as the division will pay more for Q47 in comparison with an outside company. On the other hand, fo...