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	340,000 cases
Current Production	320,000 cases
Market selling price	$6.00 per case
Variable costs	$4.00 per case (based on current production)
Fixed costs	$1.80 per case (based on current production)
Tax rate	25%

Brewing Division

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	300,000 cases
Current Production	260,000 cases
Market selling price	$40.00 per case
Variable cost*	$28.00 per case (based on current production)
Fixed cost	$10.00 per case (based on current production)
Tax rate	20%

* 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:

1. What is the likely range of transfer prices for a single case of bottles between the Bottle Making Division and the Brewery Division for the additional bottles?
2. 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?
3. 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.