Barrhaven-brew, a local Ottawa micro-brewery, recently merged with a bottle making plant 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 (note 1) 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)

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 (note 2) $28.00 per case (based on current production) Fixed cost $10.00 per case (based on current production)

Note 1: 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).

Not 2: The Variable cost of $28.00 per case includes an estimated cost of $6 per case of empty bottles.

Required:

UNLESS OTHERWISE STATED, EACH OF THESE IS A SEPARATE SITUATION. A. What is the likely range of transfer prices for an additional single case of bottles?

B. What is the likely range of transfer prices for a single case of bottles if the Bottle Making Division sells the proposed 30,000 extra cases to the Brewery Division? The special order does not requiring packaging this will reduce the cost for the Bottling division by $0.06 per case.

C. What qualitative issues should be considered by the Bottling and Brewing division as it relates to Part B?

D. 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 as it would impact the managers of the Bottling Division, the Brewing Division and the Head Office.