Effect of alternative transfer pricing methods on division operating income. Crango 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 litres of juice per 1,000 kg of cranberries. Cost and market price data for the two divisions are as follows:

REQUIRED 1. Compute Crango's operating income from harvesting 400,000 kilograms of cran- berries during June 2010 and processing them into juice.

2. Crango rewards its division managers with a bonus equal to 5% of operating income.
Compute the bonus earned by each division manager in June 2010 for each of the following transfer pricing methods:

a. 200% 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?LO1

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Harvesting Division Processing Division Variable cost per kg of cranberries $0.10 Variable processing cost $0.20 per litre of juice produced Fixed cost per kg of cranberries $0.25 Fixed cost per litre of juice produced $0.40 Selling price per kg of $0.60 Selling price per litre of juice $2.10 cranberries in outside market