Jelkin Corporation is a processor of apples. The manufacturing facility has two divisions: the puree division and the finishing division. As apples arrive at the facility, the puree division cleans and purees the apples into a smooth sauce. The apple sauce may be packaged in the puree division and sold on the wholesale market for $22 a batch, or transferred to the finishing division where it is packaged in glass jars and sold to grocery stores for $35 per batch. Jelkin is able to produce 400,000 batches per year and reports the following costs per batch:

Required:
1. What is the minimum transfer price the puree division manager would accept? What is the maximum transfer price the finishing division would accept? Briefly explain.
2. Assuming the 400,000 batches are transferred to the finishing division, compute the operating income for each division using:
(a) Market price for the transfer price,
(b) Full manufacturing cost plus 10 percent for the transfer price.
3. If the division managers are awarded a bonus based on division operating income, briefly explain which transfer price each division manager would prefer.

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Puree Division Finishing Division $ 6.00 Direct material cost Direct manufacturing labour cost Variable overhead cost Fixed overhead cost Full manufacturing cost $ 8.00 2.50 3.25 1.25 0.75 1.50 2.75 $15.00 $11.00