CranfuelCranfuel 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 processing division has a yield of 500 gallons of juice per 1,000 pounds of cranberries. Cost and market price data for the two divisions are as follows:

Harvesting Division,,,Processing Division, Variable cost per pound of cranberries,$0.03,,Variable processing cost per gallon of juice produced,$0.20 Fixed cost per pound of cranberries,$0.29,,Fixed cost per gallon of juice produced,$0.40 Selling price per pound of cranberries in outside market,$0.60,,Selling price per gallon of juice produced,$2.15

Requirement 1. Compute

CranfuelCranfuel's

operating income from harvesting

450 comma 000450,000

pounds of cranberries during June

20142014

and processing them into juice.

Revenues
Costs
Harvesting divison
Variable costs
Fixed costs
Total harvesting division costs
Processing divsion
Variable costs
Fixed costs
Total processing division costs
Total costs
Operating income

Requirement 2.

CranfuelCranfuel

rewards its division managers with a bonus equal to

55%

of operating income. Compute the bonus earned by each division manager in June

20142014

for each transfer pricing method, (a)

175175%

of costs and (b) market price. (Round the revenue per pound to the nearest cent. Round final answers to the nearest whole dollar.)

	175% of
	Full costs	Market price
Harvesting division:
Revenues
Costs
Division variable costs
Division fixed costs
Total division costs
Division operating income
Division manager's bonus

Processing division:
Revenues
Costs
Transferred-in costs
Division variable costs
Division fixed costs
Total division costs
Division operating income
Division manager's bonus

Requirement 3. Which transfer-pricing method will each division manager prefer? How might

CranfuelCranfuel

resolve any conflicts that may arise on the issue of transfer pricing?

The harvesting division manager will prefer to transfer at

175% of full costs

. The processing division manager will prefer to transfer at

175% of full costs

.

CranfuelCranfuel

may resolve or reduce transfer pricing conflicts by:

A.

Using dual transfer prices since it does not benefit the company to have the harvesting division control costs since they do not produce the end product.

B.

Requiring the two divisions to negotiate the transfer price between themselves every accounting period.

C.

Basing division managers' bonuses on overall

CranfuelCranfuel

profits in addition to division operating income.

D.

None of the above.