Effect of alternative transfer-pricing methods on division operating income. Oceanic Products is a tuna fishing company based in $t. John’s. It has three divisions:

a. Tuna Harvesting—operates a fleet of 20 trawling vessels.

b. Tuna Processing—processes the raw tuna into tuna fillets.

c. Tuna Marketing—packages tuna fillets in two-kilogram packets that are sold to wholesale distributors at $14.40 each.

The Tuna Processing Division has a yield of 500 kilograms of processed tuna fillets from 1,000 kilograms of raw tuna provided by the Tuna Harvesting Division. The Tuna Marketing Division has a yield of 300 two-kilogram packets from every 500 syste^transTr^ricing1 kilograms of processed tuna fillets provided by the Tuna Processing Division.

(The weight of the packaging material is included in the two-kilogram weight.) Cost data for each division are as follows:
Tuna Harvesting Division Variable costs per kilogram ofraw tuna Fixed costs per kilogram ofraw tuna Tuna Processing Division Variable costs per kilogram of processed tuna Fixed costs per kilogram of processed tuna Tuna Marketing Division Variable costs per two-kilogram packet Fixed costs per two-kilogram packet Fixed costs per unit are based on the estimated quantity of raw tuna, processed tuna, and two-kilogram packets to be produced during the current fishing season.
Oceanic Products has chosen to process internally all raw tuna brought in by the Tuna Harvesting Division. Other tuna processors in St. John’s purchase raw tuna from boat operators at $1.20 per kilogram. Oceanic Products has also chosen to process internally all tuna fillets into the two-kilogram packets sold by the Tuna Marketing Division. Several fish marketing companies in St.John’s purchase tuna fillets at $6 per kilogram.
Required 1. Compute the overall operating income to Oceanic Products of harvesting 1,000 kilograms ofraw tuna, processing it into tuna fillets, and then selling it in two-kilogram packets.
2. Compute the transfer prices that will be used for internal transfers (i) from the Tuna Harvesting Division to the Tuna Processing Division and (ii) from the Tuna Processing Division to the Tuna Marketing Division under each of the following transfer-pricing methods:

a. 200% of variable costs. Variable costs are the costs of the transferred-in product (if any) plus the division’s own variable costs.

b. 150% offull costs. Full costs are the costs ofthe transferred-in product (if any) plus the division’s own variable and fixed costs.

c. Market price.
3. Oceanic rewards each division manager with a bonus, calculated as 10% of division operating income (if positive). What is the amount of the bonus that will be paid to each division manager under each of the three transfer-pricing methods in requirement 2?
Which transfer-pricing method will each division manager prefer to use?