Iint Pharmaceuticals

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INT Pharmaceuticals

1. How many kilograms of basic interferon does the Medications Division request under the current variable-cost transfer pricing policy? How many kilograms does the Production Division sell into the outside market? What is the firm’s profitability (you can answer this question ignoring fixed costs, but make sure you understand why you can ignore them)?
Based on the details provided on page 5 of the case write-up, in the section detailing the required inputs for Scintron manufacturing, there are estimated sales of Scintron of 40,000,000 units. In the paragraph directly above this breakdown, we are informed that it requires 0.9 kilograms of the basic interferon to produce 10,000 units of Scintron. With this knowledge in hand, we know that 3,600 kilograms of the basic interferon will be requested by the Medications Division under the current variable-cost transfer pricing policy.
Considering the 5,440 machine hour practical capacity of the Production Line provided on page 2 of the case, and the 1 hr of machine time per 1 kilogram requirement provided on page 3, this leaves 1,840 kilograms of the basic interferon to be sold to the outside market.

Given these figures, and ignoring fixed costs, INT Pharmaceutical’s profitability is 96.84M€ as detailed below.

2. Evaluate Ms. Heinz’s claim. Estimate the change in INT’s profitability if the firm sets the transfer price equal to the outside market price for commodity interferon.
While the Medications Division Profitability goes down from 79.36M to 39.76M with the costs associated with their acquisition of basic interferon from the Production Division going up from 26.64M to 66.24M, the Production Division’s profit goes up from 17.48M to 83.72M. This shifts the firm’s total profit up to 123.48M.
The Medications Division is currently benefitting from receiving interferon from the…...

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