Amazon Beverages produces and bottles a line of soft drinks using exotic fruits from Latin America and Asia. The manufacturing process entails mixing and adding juices and coloring ingredients at the bottling plant, which is a part of Mixing Division. The finished product is packaged in a company-produced glass bottle and packed in cases of 24 bottles each. Because the appearance of the bottle heavily influences sales volume, Amazon developed a unique bottle production process at the companys container plant, which is a part of Container Division. Mixing Division uses all of the container plants production. Each division (Mixing and Container) is considered a separate profit center and evaluated as such. As the new corporate controller, you are responsible for determining the proper transfer price to use for the bottles produced for Mixing Division. At your request, Container Divisions general manager asked other bottle manufacturers to quote a price for the number and sizes demanded by Mixing Division. These competitive prices follow:
At your request, Container Division's general manager asked other bottle manufacturers to quote a price for the number and sizes demanded by Mixing Division. These competitive prices follow Price per Case Total Price Volume 600,000 equivalent cases 1,200,000 5 5,520,000 $9.20 9,840,000 13,320,000 8.20 7.40 1,800,000 An equivalent case represents 24 bottles Container Division's cost analysis indicates that it can produce bottles at these costs: Cost per Case $ 7.67 6.83 6.56 Total Cost S 4,600,000 8.200,000 11,800,000 Volume 600,000 1,200,000 1,800,000 equivalent cases These costs include fixed costs of $1,000,000 and variable costs of $6.00 per equivalent case. These data have caused considerable corporate discussion as to the proper price to use in the transfer of bottles from Container Division interest is heightened because a significant portion of a division manager's income is an incentive bonus based on profit center results Mixing Division has the following costs in addition to the bottle costs Cost per Case Total Cost 600,000 equivalent cases 1,200.000 1,800,000 $2,000.000 $3.33 2,800,000 3,600,000 233 2.00 The corporate marketing group has furnished the following price-demand relationship for the finished product. Sales Price per Case S22.00 20.00 17.00 Total Sales Revenue $13,200.000 24,000.000 30,600.000 Sales Volume 600,000 equivalent cases 1,200.000 1,800,000 Required: a. Amazon Beverages has used market price-based transfer prices in the past. Using the current market prices and costs and assuming a volume of 1.80 million cases (Enter your answers in thousands of dollars.) a-1. Calculate operating profits for ContainerDivision. a-2. Calculate operating profits for Moxing Division. a-3. Calculate operating profits for Amazon Beverages. b-1. Calculste operating profts for Container for volumes of 600,000, 1,200,000 and 1,800,000cases. (Enter your answers in thousands of dollars.) Which volume of production is the most profitable for Container? 000,000 csses 1.200.000 csses 1,800,000 cs b-2. Calculate operating protts for Moxing for voumes or 600,000,1,200,000 and 1,800,000cases. (Enter your answers in thousands of dollars.) Profit Which volume of production is the most profitable for Moxing? O 600 000 ases 1.200.000 cases 1.800.000 cases b-3. Calculate operating profits for Amazon Beverages for volumes of 600,000, 1,200,000 and 1,800,000cases. (Enter your answers 600,000 1,200,000 1,800,000 Which volume of production is the most profitable for Amazon Beverages? 600,000 cases O 1,200,000 cases 1,800,000 cases References eBook & Resources Learning Objective: 15-02 Explain the general transfer pricing rules and understand the underlying basis for them. Worksheet Difficulty: 3 Hard Learning Objective: 15-03 Identify the behavioral issues and incentive effects of negotiated transfer prices, cost-based transfer prices, and market-based transfer prices. At your request, Container Division's general manager asked other bottle manufacturers to quote a price for the number and sizes demanded by Mixing Division. These competitive prices follow Price per Case Total Price Volume 600,000 equivalent cases 1,200,000 5 5,520,000 $9.20 9,840,000 13,320,000 8.20 7.40 1,800,000 An equivalent case represents 24 bottles Container Division's cost analysis indicates that it can produce bottles at these costs: Cost per Case $ 7.67 6.83 6.56 Total Cost S 4,600,000 8.200,000 11,800,000 Volume 600,000 1,200,000 1,800,000 equivalent cases These costs include fixed costs of $1,000,000 and variable costs of $6.00 per equivalent case. These data have caused considerable corporate discussion as to the proper price to use in the transfer of bottles from Container Division interest is heightened because a significant portion of a division manager's income is an incentive bonus based on profit center results Mixing Division has the following costs in addition to the bottle costs Cost per Case Total Cost 600,000 equivalent cases 1,200.000 1,800,000 $2,000.000 $3.33 2,800,000 3,600,000 233 2.00 The corporate marketing group has furnished the following price-demand relationship for the finished product. Sales Price per Case S22.00 20.00 17.00 Total Sales Revenue $13,200.000 24,000.000 30,600.000 Sales Volume 600,000 equivalent cases 1,200.000 1,800,000 Required: a. Amazon Beverages has used market price-based transfer prices in the past. Using the current market prices and costs and assuming a volume of 1.80 million cases (Enter your answers in thousands of dollars.) a-1. Calculate operating profits for ContainerDivision. a-2. Calculate operating profits for Moxing Division. a-3. Calculate operating profits for Amazon Beverages. b-1. Calculste operating profts for Container for volumes of 600,000, 1,200,000 and 1,800,000cases. (Enter your answers in thousands of dollars.) Which volume of production is the most profitable for Container? 000,000 csses 1.200.000 csses 1,800,000 cs b-2. Calculate operating protts for Moxing for voumes or 600,000,1,200,000 and 1,800,000cases. (Enter your answers in thousands of dollars.) Profit Which volume of production is the most profitable for Moxing? O 600 000 ases 1.200.000 cases 1.800.000 cases b-3. Calculate operating profits for Amazon Beverages for volumes of 600,000, 1,200,000 and 1,800,000cases. (Enter your answers 600,000 1,200,000 1,800,000 Which volume of production is the most profitable for Amazon Beverages? 600,000 cases O 1,200,000 cases 1,800,000 cases References eBook & Resources Learning Objective: 15-02 Explain the general transfer pricing rules and understand the underlying basis for them. Worksheet Difficulty: 3 Hard Learning Objective: 15-03 Identify the behavioral issues and incentive effects of negotiated transfer prices, cost-based transfer prices, and market-based transfer prices
