Question

Cran Boost Products is a cranberry cooperative that operates two​ divisions, a harvesting division and a processing division.​ Currently, all of​ harvesting's output is converted into cranberry juice by the processing​ division, and the juice is sold to large beverage companies that produce cranberry juice blends. The processing division has a yield of 500 gallons of juice per​ 1,000 pounds of cranberries. Cost and market price data for the two divisions are as​ follows:

Harvesting Division

Processing Division

Variable cost per pound of cranberries

$0.03

Variable processing cost per gallon of juice produced

$0.15

Fixed cost per pound of cranberries

$0.25

Fixed cost per gallon of juice produced

$0.36

Selling price per pound of cranberries in outside market

$0.55

Selling price per gallon of juice

$2.25

Requirements:

1.	Compute Cran Boost​'s operating income from harvesting 400,000 pounds of cranberries during June 2017 and processing them into juice.
2.	Cran Boost rewards its division managers with a bonus equal to 4​%of operating income. Compute the bonus earned by each division manager in June 2017 for each of the following​ transfer-pricing methods:
	a.	175​% of full cost
	b.	Market price
3.	Which​ transfer-pricing method will each division manager​ prefer? How might Cran Boost resolve any conflicts that may arise on the issue of transfer​ pricing?

Answer 1