Account help Question

Barrhaven-brew, a local Ottawa micro-brewery, recently merged with a bottle making plant in New York to complement its Barrhaven brewing facilities. Barrhaven-brew has two divisions: Bottle Making and Brewing. Each division is evaluated as a profit centre. Bottle Making Division The bottle making division makes cases of empty bottles and sells them on both the open market and to the brewing division. Other information is as follows: Capacity Current Production Market selling price Variable costs Fixed costs Tax rate Brewing Division 340,000 cases 320,000 cases $6.00 per case $4.00 per case (based on current production) $1.80 per case (based on current production) 25% The brewing division brews and bottles beer. It buys empty bottles from both the bottle making division and the open market. Other information is as follows: Capacity Current Production Market selling price Variable cost* Fixed cost Tax rate 300,000 cases 260,000 cases $40.00 per case $28.00 per case (based on current production) $10.00 per case (based on current production) 30% *Note: The Variable cost of $28.00 per case includes an estimated cost of $6 per case of bottles Both CRA and the IRS will accept a range of transfer prices between full cost and market price. Current production for the Bottle division is estimated to be sales of 320,000 cases (170,000 cases on the open market and 150,000 cases to the brewery division). The brewery division would like to purchase an additional 30,000 cases from the bottle division. The special order does not requiring packaging - this will reduce the cost for the Bottling division by $0.06 per case. EACH OF THESE ARE SEPARATE SITUATIONS: A. What is the likely range of transfer prices for a case of bottles between the Bottle Making Division and the Brewery Division? B. Both CRA and the IRS will accept a range of transfer prices between full cost and market price. What is the optimal transfer price between the bottle making and brewing divisions from the perspective of Barrhaven-brew in order to maximize overall profitability for the entire company? C. What would happen if head-office decided to classify the bottling division as a cost centre instead of a profit centre? Explain the pros and cons of this potential change.