Effect of market prices oscillations. Green Energy Corp. makes biodiesel from corn. It is 1 Com Division contibution organized into two operating divisions. The Corn Division leases large farms to grow the margin, $13,000 varieties of corn needed by the Ethanol Division. The biodiesel produced by the Ethanol Division is sold to corporate customers at a price of $1.50 per litre; each tonne of corn yields 500 litres of biodiesel. The Corn Division transfers its total output of 200,000 tonnes of corn to the Ethanol Division at market price. The market price is determined twice a year

(November 5 and May 5 or the immediately previous day if it is a holiday), one per harvesting season, and it is the price of “Maize (corn), US No. 2 Yellow, FOB Gulf of Mexico, US price, USS per metric tonne” set at the Chicago Board of Trade. For the current season the price determined is $250; however, unlimited quantities of corn can be purchased and sold on the outside market at prices that change on a daily basis. To sell the corn on the outside market, the Corn Division would have to incur variable distribution costs of $5 per tonne. Similarly, if the Ethanol Division purchased corn from the open market, it would have to incur variable purchasing costs of $3 per tonne.

The following table provides a detail of costs per tonne in both divisions:

REQUIRED 1. Calculate the operating incomes for both divisions operating at a volume of 200,000 tonnes of corn transferred.
2. Suppose Green Energy rewards each division manager with a bonus, calculated as 1% of division operating income (if positive). What is the amount of bonus that will be paid to each division manager?
3. Suppose that an independent farmer contacts the Ethanol Division and offers to sell 50,000 tonnes, at $220 each, delivered at the door of the processing plant because it has been an extremely good season for corn and the excess of supply is driving its market price : 1130 | charter 2s down. If the Corn Division can sell its excess in the market at the Chicago price of $220, determine if it is convenient for Green Energy to accept the offer of the independent farmer. Determine the bonuses of each manager.LO1

Transcribed Image Text:

Direct materials Direct manufacturing labour costs Manufacturing overhead costs Manufacturing costs per unit Corn Division (tonnes) $ 60 $ 50 $ 100* $ 210 Ethanol Division (litres) Corn $0.10 $ 0.80** $ 0.90+ corn