(Effect of market prices oscillations)

Green Energy Corp. makes biodiesel from corn, it is organized into two operating divisions. The Corn Division leases large farms to grow the varieties of corn needed by the Ethanol Division. The biodiesel produced by the Ethanol Division is sold to corporate customers at a price of $1.50 per litter, each ton of corn yields 500 liters of biodiesel. The Corn Division transfers its total output of 200,000 tons of corn to the Ethanol Division at market price. The market price is determined twice a year (November 5^thand May 5^thor the immediate previous day if it is a holyday) one per each harvesting season, and it is the price of "Maize (corn), U.S. No.2 Yellow, FOB Gulf of Mexico, U.S. price, US$ per metric tonne" set at the Chicago Board of Trade. For the current season the price determined is $250, however unlimited quantities of corn can be purchased and sold on the outside market at prices that change on a daily basis. To sell the corn on the outside market, the Corn Division would have to incur variable distribution costs of $5 per ton. Similarly, if the Ethanol Division purchased corn from the open market, it would have to incur variable purchasing costs of $3 per ton.

The following table provides a detail of costs per ton in both divisions:

Corn Division (tons)

Ethanol Division (litters)

Direct materials

$60

Corn

Direct manufacturing labour costs

$50

$0.10

Manufacturing overhead costs

$100*

$0.80**

Manufacturing costs per unit

$200

$1.35

* Manufacturing overhead costs in the Corn Division are 25% fixed and 75% variable.

** Manufacturing overhead costs in the Ethanol are 75% fixed and 25% variable.

Required

1.Calculate the operating incomes for both divisions operating at a volume of 200,000 tons of corn transferred.

2.Suppose Green Energy rewards each division manager with a bonus, calculated as 1% of division operating income (if positive). What is the amount of bonus that will be paid to each division manager?

3.Suppose that an independent farmer contacts the Ethanol Division and offers to sell 50,000 tons at $220 each delivered at the door of the processing plant because it has been an extremely good season for corn and the excess of supply is driving it market price down. If the Corn Division can sell its excess in the market at the Chicago price of $220 determine if it is convenient for Green Energy to accept the offer of the independent farmer. Determine the bonuses of each manager.