Evaluate Profit Impact of Alternative Transfer Decisions: A. R. Oma, Inc. manufactures a line of men's colognes. The manufacturing process entails mixing and the addition of aromatic and coloring ingredients; the finished product is packaged in a company-produced glass bottle and packed in cases containing six bottles each. Since sales volume is heavily influenced by the appearance of the bottle, the company developed unique bottle production processes. All bottle production is used by the cologne manufacturing plant. Each division is considered a separate profit center and evaluated as such. As the new corporate controller, you are responsible for the definition of a proper transfer price to use for the bottles produced for the cologne division. At your request, the bottle division general manager asked other bottle manufacturers to quote a price for the quantity and sizes demanded by the cologne division. These competitive prices are:

A cost analysis of the bottle manufacture division indicates that they can produce bottles at these costs:

These costs include fixed costs of $1.2 million and variable costs of $1 per equivalent case. These data have caused considerable corporate discussion as to the proper price to use in the transfer of bottles to the cologne division. This interest is heightened because a significant portion of a division manager's income is an incentive bonus based on profit center results. The cologne production division has the following costs in addition to the bottle costs:

The marketing department furnished the following price-demand relationship for the finished product:

Required:

a. The A. R. Oma Company has used market price transfer prices in the past. Using the current market prices and costs, and assuming a volume of 6 million cases. calculate operating profits for:

(1) The bottle division. (2) The cologne division. (3) The corporation.

b. Is this production and sales level the most profitable volume for:

(1) The bottle division? (2) The cologne division? (3) The corporation?

Explain your answers.

Transcribed Image Text:

Price per Volume Total Price Case 2,000,000 eq. casesa $ 4,000,000 $2.00 4,000,000 6,000,000 7,000,000 1.75 10,000,000 1.67