Question

CrangoCrango 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	$0.04		Variable processing cost per gallon of juice produced	$0.35
Fixed cost per pound of cranberries	$0.32		Fixed cost per gallon of juice produced	$0.37
Selling price per pound of cranberries in outside market	$0.68		Selling price per gallon of juice produced	$2.30

1.

Compute Crango?'s operating income from harvesting 460 comma 000 pounds of cranberries during June 2014 and processing them into juice.

2.

Crango rewards its division managers with a bonus equal to 6?% of operating income. Compute the bonus earned by each division manager in June 2014 for each of the following transfer pricing? methods:

a. 150?% of full cost

b. Market price

3. Which? transfer-pricing method will each division manager? prefer? How might Crango resolve any conflicts that may arise on the issue of transfer? pricing?

1.

Revenues
Costs
Harvesting divison
Variable costs
Fixed costs
Total harvesting division costs
Processing divsion
Variable costs
Fixed costs
Total processing division costs
Total costs
Operating income

Answer 1

(1) Operating Income :-

Revenue (230000 * 2.30)	529000
Costs:-
Harvesting Division:-
Variable cost (460000 * 0.04)	18400
Fixed Cost (460000*0.32)	147200
Total Harvesting Division Cost (A)	165600
Processing Division:-
Variable cost (230000 * 0.35)	80500
Fixed Cost (230000*0.37)	85100
Total Processing Division Cost (B)	165600
Total Cost (A+B)	331200
Operating income (529000 – 331200)	197800

Juice Gallons sold = (460000 pounds/1000) * 500 = 230000 gallons

(2a) Transfer Price = 150% of Full cost:-

Harvesting Division
Variable cost (460000 * 0.04)	18400
Fixed Cost (460000*0.32)	147200
Total Harvesting Division Cost	165600
Transfer Price (165600 * 150%)	248400
Operating Income	82800
Bonus (82800 * 6%)	4968

Processing Division:-
Pounds Transfer from Harvesting Division	248400
Variable cost (230000 * 0.35)	80500
Fixed Cost (230000*0.37)	85100
Total Processing Division Cost (B)	414000
Revenue (230000 * 2.30)	529000
Operating Income	115000
Bonus (115000 * 6%)	6900

(2a) Transfer Price = Market Price:-

Harvesting Division
Variable cost (460000 * 0.04)	18400
Fixed Cost (460000*0.32)	147200
Total Harvesting Division Cost	165600
Transfer Price (460000*0.68)	312800
Operating Income	147200
Bonus (147200 * 6%)	8832

Processing Division:-
Pounds Transfer from Harvesting Division	312800
Variable cost (230000 * 0.35)	80500
Fixed Cost (230000*0.37)	85100
Total Processing Division Cost (B)	478400
Revenue (230000 * 2.30)	529000
Operating Income	50600
Bonus (50600 * 6%)	3036

(3) Summary of Bonus :-

	Transfer Price = 150% of Full cost	Transfer Price = Market Price
Harvesting Division Manager Bonus	4968	8832
Processing Division Manager Bonus	6900	3036

Harvesting Division Manager will prefer Transfer Price = Market Price

Processing Division Manager will prefer Transfer Price = Market Price

There is a range of Transfer Price:-

     248400 =< Transfer Price <= 312800

Cargo may resolve the conflict to set TP in between this range