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Spartan Enterprises runs a chain of drive-in ice cream stands in Lansing during the summer season. Managers of all stands are told to act as if they owned the stand and are judged on their profit performance. Spartan Enterprises has rented an ice cream machine for the summer for $3,600 to supply its stands with ice cream. Spartan is not allowed to sell ice cream to other dealers because it cannot obtain a dairy license. The manager of the ice cream machine charges the stands $4 per gallon.
Operating figures for the machine for the summer are as follows:
The manager of the Okemos Drive-In, one of the Spartan drive-ins, is seeking permission to sign a contract to buy ice cream from an outside supplier at $3.35 a gallon. The Okemos Drive-In uses 4,000 gallons of ice cream during the summer. Elizabeth Chuk, controller of Spartan, refers this request to you. You determine that the other fixed costs of operating the machine will decrease by $900 if the Okemos Drive-In purchases from an outside supplier. Chuk wants an analysis of the request in terms of overall company objectives and an explanation of your conclusion. What is the appropriate transfer price?
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