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
590,000 equivalent casesa	$	5,369,000		$	9.10
1,180,000		9,558,000			8.10
1,770,000		12,921,000			7.30

^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
590,000 equivalent cases	$	4,471,000		$	7.58
1,180,000		7,952,000			6.74
1,770,000		11,433,000			6.46

These costs include fixed costs of $990,000 and variable costs of $5.90 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
590,000 equivalent cases	$	1,990,000		$	3.37
1,180,000		2,790,000			2.36
1,770,000		3,590,000			2.03

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

Sales Volume	Total Sales Revenue			Sales Price per Case
590,000 equivalent cases	$	12,921,000		$	21.90
1,180,000		23,482,000			19.90
1,770,000		29,913,000			16.90

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 1.77 million cases (Enter your answers in thousands of dollars.)

a-1. Calculate operating profits for Container Division.

	Profit

a-2. Calculate operating profits for Mixing Division.

	Profit

a-3. Calculate operating profits for Amazon Beverages.

	Profit

b-1. Calculate operating profits for Container for volumes of 590,000, 1,180,000 and 1,770,000cases. (Enter your answers in thousands of dollars.)

	590,000 cases 1,180,000 cases 1,770,000 cases Profit

Which volume of production is the most profitable for Container?

	590,000 cases
	1,180,000 cases
	1,770,000 cases

b-2. Calculate operating profits for Mixing for volumes of 590,000, 1,180,000 and 1,770,000cases. (Enter your answers in thousands of dollars.)

	590,000 cases 1,180,000 cases 1,770,000 cases Profit

Which volume of production is the most profitable for Mixing?

	590,000 cases
	1,180,000 cases
	1,770,000 cases

b-3. Calculate operating profits for Amazon Beverages for volumes of 590,000, 1,180,000 and 1,770,000cases. (Enter your answers in thousands of dollars.)

	590,000 cases 1,180,000 cases 1,770,000 cases Profit

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

	590,000 cases
	1,180,000 cases
	1,770,000 cases

Answer 1

Part A - 1

operating profits for Container Division

Revenue	12921 (1770*7.30)
Cost	11433 (1770*5.90)+990
Profit	1488

Profit = $1488 or $1488000

Part A-2

operating profits for Mixing Division

Revenue	29913 (1770*16.90)
Cost	16511 (12921+3590)
Profit	13402

Profit = $13402 or $13402000

Part A-3

operating profits for Amazon Beverages

Revenue	29913 (1770*16.90)
Cost	15023 (11433+3590)
Profit	14890

Profit = $14890 = $14890000

Part b-1

operating profits for Container for volumes of 590,000, 1,180,000 and 1,770,000cases

	590	1180	1770
Revenue	5369	9558	12921
Cost	4471	7952	11433
Profit	898	1606	1488

1,180,000 cases is the most profitable for Container.

Part B - 2

operating profits for Mixing for volumes of 590,000, 1,180,000 and 1,770,000cases.

	590	1180	1770
Revenue	12921	23482	29913
Cost	7359 (5369+1990)	12348 (9558+2790)	16511 (12921+3590)
Profit	5562	1134	13402

1,770,000 cases is the most profitable for Mixing

Part B - 3

	590	1180	1770
Revenue	12921	23482	29913
Cost	6461 (4471+1990)	10742 (7952+2790)	15023 (11433+3590)
Profit	6460	12740	14890

1,770,000 cases is the most profitable for Amazon Beverages