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.)

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

Solution a:

Computation of operating profit - 1.35 million cases
Particulars	Container	Mixing	Amazon Beverages
Transfer price per case	$5.90	$15.50	$0.00
Sale Price per case	$0.00	$0.00	$15.50
Cost per Case:
Container	$5.13	$5.90	$5.13
Mixing	$0.00	$2.56	$2.56
Total Revenue (In thousand of dollars)	$7,965.00	$20,925.00	$20,925.00
Total Cost (In thousand of dollars)	$6,925.50	$11,421.00	$10,381.50
Operating Profit (In thousand of Dollars)	$1,039.50	$9,504.00	$10,543.50

Solution b1:

Computation of operating profit - Container
Particulars	450000 Cases	900000 Cases	1350000 Cases
Transfer price per case	$7.70	$6.70	$5.90
Cost per Case:
Container	$6.39	$5.44	$5.13
Mixing	$0.00	$0.00	$0.00
Total Revenue (In thousand of dollars)	$3,465.00	$6,030.00	$7,965.00
Total Cost (In thousand of dollars)	$2,875.50	$4,896.00	$6,925.50
Operating Profit (In thousand of Dollars)	$589.50	$1,134.00	$1,039.50
Profitable volume of production		Profitable

Solution b2:

Computation of operating profit - Mixing
Particulars	450000 Cases	900000 Cases	1350000 Cases
Transfer price per case	$20.50	$18.50	$15.50
Cost per Case:
Container	$7.70	$6.70	$5.90
Mixing	$4.11	$2.94	$2.56
Total Revenue (In thousand of dollars)	$9,225.00	$16,650.00	$20,925.00
Total Cost (In thousand of dollars)	$5,314.50	$8,676.00	$11,421.00
Operating Profit (In thousand of Dollars)	$3,910.50	$7,974.00	$9,504.00
Profitable volume of production			Profitable

Solution b3:

Computation of operating profit - Amazon Beverages
Particulars	450000 Cases	900000 Cases	1350000 Cases
Sales price per case	$20.50	$18.50	$15.50
Cost per Case:
Container	$6.39	$5.44	$5.13
Mixing	$4.11	$2.94	$2.56
Total Revenue (In thousand of dollars)	$9,225.00	$16,650.00	$20,925.00
Total Cost (In thousand of dollars)	$4,725.00	$7,542.00	$10,381.50
Operating Profit (In thousand of Dollars)	$4,500.00	$9,108.00	$10,543.50
Profitable volume of production			Profitable