Cranfuel Products is a cranberry cooperative that operates two$$ divisions: a harvesting division and a processing division.$$ Currently, all of$$ harvesting's output is converted into cranberry juice by the processing$$ division, and the juice is sold to large beverage companies that produce cranberry juice blends. The company calculated the operating income and the corresponding division$$ managers' bonuses when $182,000$ kilograms of cranberries are harvested and processed into juice under two different transfer pricing$$ methods: Bonus calculations

$180\%$ of

Full Costs

Market Price

Harvesting Division:

Revenues

$$252,743$

$$240,713$

Costs

Division variable costs

$40,495$

$40,495$

Division fixed costs

$99,918$

$99,918$

Total Division costs

$140,413$

$140,413$

Division operating income

$$112,330$

$$100,300$

Division manager's bonus

$$6,740$

$$6,018$

Processing Division:

Revenues

$$196,011$

$$196,011$

Costs Transferred$-$in costs

$252,743$

$240,713$

Division variable costs

$18,774$

$18,774$

Division fixed costs

$37,300$

$37,300$

Total Division costs

$308,817$

$296,787$

Division operating income

$$(112,806)$

$$(100,776)$

Division manager's bonus

$$0$

$$0$

Assume that Pat$$ Borges, CEO of Cranfuel$,$ had mandated a transfer price equal to $180\%$ of full cost.$$ Now, she decides to decentralize some management decisions and sends around a memo that$$ states: "Effective$$ immediately, each division of Cranfuel is free to make its own decisions regarding the purchase of direct materials and the sale of finished$$ products." Required

$1.$

Give an example of a$$ goal$-$congruence problem that will arise if Cranfuel continues to use a transfer price of $180\%$ of full cost and$$ Borges's decentralization policy is adopted.

$2.$

Borges feels that a dual$$ transfer$-$pricing policy will improve$$ goal$-$congruence. She suggests that transfers out of the harvesting division be made at $180\%$ of full cost and transfers into the processing division be made at market price. Compute the operating income of each division under this dual$$ transfer$-$pricing method when $182,000$ kilograms of cranberries are harvested during June and processed into juice.

$3.$

Why is the sum of the division operating incomes computed in requirement $2$ different from Cranfuel$\text{'}$s operating income from harvesting and processing $182,000$ kilograms of$$ cranberries?

$4.$

Suggest two problems that may arise if Cranfuel implements the dual transfer prices described in requirement $2.$