Activity #1: Part 2 Campfire Treats, Inc. operates a decentralized, multi-division company. Campfire Treats has three main divisions: the Marshmallow Division, the Cookie Division, and the Smore Division.

Marshmallow Division: Manufactures marshmallows. Marshmallows can be sold on the outside market for $3.50 per one-pound package. The Marshmallow Division is currently working at 85% of capacity to meet demand (which includes all of the marshmallows currently needed by and transferred to the Smore Division and all of the marshmallows sold externally). A one-pound package of marshmallows is enough to make 50 smore treats. Cookie Division: Manufactures fudge-covered graham cookies. Fudge graham cookies can be sold on the outside market for $4 per one-pound package. The Cookie Division is operating at 100% of capacity. A one-pound package of fudge graham cookies is enough to make 20 smore treats. Smore Division: Assembles and packages smore treats. The marshmallows are toasted and additional flavorings are added, then the toasted marshmallow is sandwiched between two fudge graham cookies to create a smore treat. These treats are packaged and sold on the market for $0.80 per smore. The Smore Division is operating at 80% of capacity. The direct materials needed for the smore treat product are fudge graham cookies, marshmallows, and additional flavorings. The Smore Division purchases the flavorings externally and this amount is included as direct materials in the chart below. The Smore Division can purchase the fudge graham cookies and marshmallows either internally or externally. *Note: The direct material costs in the chart below for the Smore Division does NOT include the marshmallow costs or the fudge graham cookie costs since those amounts will depend on the transfer price and/or market price. The following table gives the manufacturing cost per unit for the Marshmallow Division, the Cookie Division, and the Smore Division for 2016:

	Marshmallow Division (per pound)	Cookie Division (per pound)	S'more Division (per s'more treat)
Direct material Cost	$0.60	$0.90	$0.04 *
Direct Mfg. Labor Cost	.35	.70	.16
Variable MOH Cost	.55	.40	.30
Fixed MOH Cost (at capacity)	.50	.70	.03
Total Mfg Cost per unit	$2.00	$2.70	$0.53 *
Capacity	40,000 pounds	60,000 pounds	1,500,000 S'mores

1 .Campfire Treats, Inc. currently requires the Cookie Division to transfer its total yearly output of 60,000 pounds of fudge graham cookies to the Smore Division at 110% of full manufacturing cost. Unlimited quantities of fudge graham cookies can be purchased and sold on the outside market at $4.00 per one pound package. (Assume the marshmallow cost is $0.11 per smore)

a. Calculate the operating incomes for the Cookie Division and Smore Division when the full 60,000 pounds of fudge grahamm cookies are transferred between departments under the following pricing methods: (i) market price and (ii) 110% of full manufacturing cost.

b. Suppose Smores 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 under the transfer-pricing methods used in requirement 2a? Which transfer pricing method will each division manager prefer to use?