Question

Amazon Beverages produces and bottles a line of soft drinks using exotic fruits from Latin America and Asia. The manufacturing process entails mixing and adding juices and coloring ingredients at the bottling plant, which is a part of Mixing Division. The finished product is packaged in a company-produced glass bottle and packed in cases of 24 bottles each.

Because the appearance of the bottle heavily influences sales volume, Amazon developed a unique bottle production process at the company’s container plant, which is a part of Container Division. Mixing Division uses all of the container plant’s production. Each division (Mixing and Container) is considered a separate profit center and evaluated as such. As the new corporate controller, you are responsible for determining the proper transfer price to use for the bottles produced for Mixing Division.

At your request, Container Division’s general manager asked other bottle manufacturers to quote a price for the number and sizes demanded by Mixing Division. These competitive prices follow:

Volume	Total Price			Price per Case
450,000 equivalent casesa	$	3,465,000		$	7.70
900,000		6,030,000			6.70
1,350,000		7,965,000			5.90

^a An equivalent case represents 24 bottles.

Container Division's cost analysis indicates that it can produce bottles at these costs:

Volume	Total Cost			Cost per Case
450,000 equivalent cases	$	2,875,000		$	6.39
900,000		4,900,000			5.44
1,350,000		6,925,000			5.13

These costs include fixed costs of $850,000 and variable costs of $4.50 per equivalent case. These data have caused considerable corporate discussion as to the proper price to use in the transfer of bottles from Container Division to Mixing Division. This interest is heightened because a significant portion of a division manager’s income is an incentive bonus based on profit center results.

Mixing Division has the following costs in addition to the bottle costs:

Volume	Total Cost			Cost per Case
450,000 equivalent cases	$	1,850,000		$	4.11
900,000		2,650,000			2.94
1,350,000		3,450,000			2.56

The corporate marketing group has furnished the following price–demand relationship for the finished product:

Sales Volume	Total Sales Revenue			Sales Price per Case
450,000 equivalent cases	$	9,225,000		$	20.50
900,000		16,650,000			18.50
1,350,000		20,925,000			15.50

Required:

a. Amazon Beverages has used market price–based transfer prices in the past. Using the current market prices and costs and assuming a volume of 1.35 million cases (Enter your answers in thousands of dollars.)

a-1. Calculate operating profits for Container Division.

a-2. Calculate operating profits for Mixing Division.

a-3. Calculate operating profits for Amazon Beverages.

b-1. Calculate operating profits for Container for volumes of 450,000, 900,000 and 1,350,000cases. (Enter your answers in thousands of dollars.)

	450,000 cases 900,000 cases 1,350,000 cases Profit

Which volume of production is the most profitable for Container?

	450,000 cases
	900,000 cases
	1,350,000 cases

b-2. Calculate operating profits for Mixing for volumes of 450,000, 900,000 and 1,350,000cases. (Enter your answers in thousands of dollars.)

Which volume of production is the most profitable for Container?

	450,000 cases
	900,000 cases
	1,350,000 cases

b-2. Calculate operating profits for Mixing for volumes of 450,000, 900,000 and 1,350,000cases. (Enter your answers in thousands of dollars.)

Which volume of production is the most profitable for Mixing?

	450,000 cases
	900,000 cases
	1,350,000 cases

b-3. Calculate operating profits for Amazon Beverages for volumes of 450,000, 900,000 and 1,350,000cases. (Enter your answers in thousands of dollars.)

Which volume of production is the most profitable for Amazon Beverages?

	450,000 cases
	900,000 cases
	1,350,000 cases

Answer 1

a-1	Operating profits of container division:
					$
	Sales revenue		(1350000*5.90)		7965000
	Less: Costs
	Variable		(1350000*4.50)		6075000
	Operating profit				1890000
a-2	Operating profits of Mixing division:
					$	$
	Sales revenue		(1350000*15.50)			20925000
	Less: Costs
	Variable		(1350000*2.56)		3456000
	Transfer from container division				7965000	11421000
	Operating profit					9504000
a-3	Operating profits for Amazon beverages:
					$	$
	Sales revenue		(1350000*15.50)			20925000
	Less: Variable Costs
	Container				6075000
	Mixing				3456000	9531000
	Operating profit					11394000
b-1	Operating profits of container division:
					For 450000 Cases	For 900000 Cases	For 1350000 Cases
	Sales revenue				3465000	6030000	7965000
					(450000*7.70)	(900000*6.70)	(1350000*5.90)
	Less: Costs
	Variable				2025000	4050000	6075000
					(450000*4.50)	(900000*4.50)	(1350000*4.50)
	Operating profit				1440000	1980000	1890000
b-2	Operating profits of Mixing division:
					For 450000 Cases		For 900000 Cases		For 1350000 Cases
	Sales revenue					9225000		16650000		20925000
						(450000*20.50)		(900000*18.50)		(1350000*15.50)
	Less: Costs
	Variable				1849500		2646000		3456000
					(450000*4.11)		(900000*2.94)		(1350000*2.56)
	Transfer from container division				3465000	5314500	6030000	8676000	7965000	11421000
	Operating profit					3910500		7974000		9504000
b-3	Operating profits for Amazon beverages:
					For 450000 Cases		For 900000 Cases		For 1350000 Cases
	Sales revenue					9225000		16650000		20925000
						(450000*20.50)		(900000*18.50)		(1350000*15.50)
	Less: Variable Costs
	Container				2025000		4050000		6075000
	Mixing				1849500	3874500	2646000	6696000	3456000	9531000
	Operating profit					5350500				11394000