Question
Management of Great Springs Bottled Water Company has asked you, the controller, to develop a transfer pricing system for the company. The Transportation Department of
Management of Great Springs Bottled Water Company has asked you, the controller, to develop a transfer pricing system for the company. The Transportation Department of the company sells all of its product to the Bottling Department of the company. Thus the Transportation Department's sales become the Bottling Department's cost of goods sold. In order to determine an optimal transfer pricing system, management would like you to demonstrate what an income statement would look like under a cost, market, and negotiated transfer pricing structure. These various transfer prices are listed below.
Cost-based | $0.62 |
Market-based | $0.74 |
Negotiated | $0.70 |
Gallons transferred | 277,000 |
Prepare an income statement for each of the transfer prices by filling in the missing numbers in the provided income statement based on each transfer price and calculate the operating income/loss percentage. Round your answers to the nearest whole number.
Great Springs Bottled Water Company Income Statement (Cost-based) Month Ending August 31, 20xx | ||||
Transportation | Bottling | |||
Sales | $fill in the blank 1 | $287,000 | ||
Cost of goods sold | 89,305 | fill in the blank 2 | ||
Gross profit | $fill in the blank 3 | $fill in the blank 4 | ||
Expenses: | ||||
Fuel/utility expense | $14,000 | $3,100 | ||
Wages expense | 43,090 | 57,300 | ||
Costs allocated from corporate | 17,235 | 14,000 | ||
Total expenses | $74,325 | $74,400 | ||
Operating income/(loss) in dollars | $fill in the blank 5 | $fill in the blank 6 | ||
Operating income/(loss) in percentage | fill in the blank 7 | % | fill in the blank 8 | % |
Great Springs Bottled Water Company Income Statement (Market-based) Month Ending August 31, 20xx | ||||
Transportation | Bottling | |||
Sales | $fill in the blank 9 | $287,000 | ||
Cost of goods sold | 89,305 | fill in the blank 10 | ||
Gross profit | $fill in the blank 11 | $fill in the blank 12 | ||
Expenses: | ||||
Fuel/utility expense | $14,000 | $3,100 | ||
Wages expense | 43,090 | 57,300 | ||
Costs allocated from corporate | 17,235 | 14,000 | ||
Total expenses | $74,325 | $74,400 | ||
Operating income/(loss) in dollars | $fill in the blank 13 | $fill in the blank 14 | ||
Operating income/(loss) in percentage | fill in the blank 15 | % | fill in the blank 16 | % |
Great Springs Bottled Water Company Income Statement (Negotiated) Month Ending August 31, 20xx | ||||
Transportation | Bottling | |||
Sales | $fill in the blank 17 | $287,000 | ||
Cost of goods sold | 89,305 | fill in the blank 18 | ||
Gross profit | $fill in the blank 19 | $fill in the blank 20 | ||
Expenses: | ||||
Fuel/utility expense | $14,000 | $3,100 | ||
Wages expense | 43,090 | 57,300 | ||
Costs allocated from corporate | 17,235 | 14,000 | ||
Total expenses | $74,325 | $74,400 | ||
Operating income/(loss) in dollars | $fill in the blank 21 | $fill in the blank 22 | ||
Operating income/(loss) in percentage | fill in the blank 23 | % | fill in the blank 24 | % |
Which of the following statements best describes your results?
a. | The operating income of the transportation division will be higher than the operating income of the bottling division under all three transfer pricing systems. |
b. | The operating income of the transportation division will be higher than the operating income of the bottling division under the cost-based and market-based transfer pricing systems only. |
c. | The operating income of the transportation division will be higher than the operating income of the bottling division under the cost-based and negotiated transfer pricing systems only. |
d. | The operating income of the transportation division will be higher than the operating income of the bottling division under the negotiated and market-based transfer pricing systems only. |
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