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.

Volume	Total Price			Price per Case
400,000 equivalent casesa	$	2,880,000		$	7.20
800,000		5,000,000			6.25
1,200,000		6,480,000			5.40
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 400,000 equivalent cases $ 2,400,000 $ 6.00 800,000 4,000,000 5.00 1,200,000 5,600,000 4.67 These costs include fixed costs of $800,000 and variable costs of $4 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 400,000 equivalent cases $ 1,800,000 $ 4.50 800,000 2,600,000 3.25 1,200,000 3,400,000 2.83 The corporate marketing group has furnished the following price–demand relationship for the finished product: Sales Volume Total Sales Revenue Sales Price per Case 400,000 equivalent cases $ 8,000,000 $ 20 800,000 14,400,000 18 1,200,000 18,000,000 15 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 1.2 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 400,000, 800,000 and 1,200,000 cases. (Enter your answers in thousands of dollars.) b-2. Calculate operating profits for Mixing for volumes of 400,000, 800,000 and 1,200,000 cases. (Enter your answers in thousands of dollars.) b-3. Calculate operating profits for Amazon Beverages for volumes of 400,000, 800,000 and 1,200,000 cases. (Enter your answers in thousands of dollars.)

Answer 1

A1	Operating Profit of Container division
	Revenue	6480
	Less: Cost	5600
	Operating Income	880
A2
	Operating Profit of Mixing Dept
	Revenue	18000
	Less: Cost (6480+3400)	9880
	Operating Income	8120
A3
	Operating profit Amazon beverages
	Revenue	18000
	Less: Cost (5600+3400)	9000
	Operating Income	9000

B 1.	Operating profit for containers
	Cases	400000	800000	1200000
	Revenue	2880	5000	6480
	Less: Cost	2400	4000	5600
	Operating profit	480	1000	880
	Most profitable @ 800000 Cases
B 2.
	Operating profit for Mixing
	Cases	400000	800000	1200000
	Revenue	8000	14400	18000
	Less: Cost	4680	7600	9880
		(2880+1800)	(5000+2600)	(6480+3400)
	Operating profit	3320	6800	8120
	Most profitable @ 1200000 cases
B 3.	Operating profit of Amazon Beverages
	Cases	400000	800000	1200000
	Revenue	8000	14400	18000
	Less: Cost	4200	6600	9000
		(2400+1800)	(4000+2600)	(5600+3400)
	Operating profit	3800	7800	9000
	Most profitable @ 1200000 cases