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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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