P22-29

Cran Benefit 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 340,000 pounds of cranberries are harvested and processed into juice under two different transfer pricing methods:

	200% of
	Full costs	Market price
Harvesting division:
Revenues	$163,200	$204,000
Costs
Division variable costs	13,600	13,600
Division fixed costs	68,000	68,000
Total division costs	81,600	81,600
Division operating income	$81,600	$122,400
Division manager's bonus	$4,080	$6,120

Assume that Pat Borges, CEO of Cran Benefit, had mandated a transfer price equal to 200% of full cost. Now he decides to decentralize some management decisions and sends around a memo that states the following: "Effective immediately, each division of Cran Benefit is free to make its own decisions regarding the purchase of direct materials and the sale of finished products."

Requirements:

1.	Give an example of a goal-congruence problem that will arise if Cran Benefit continues to use a transfer price of 200% of full cost and Borges's decentralization policy is adopted.
2.	Borges feels that a dual transfer-pricing policy will improve goal congruence. He suggests that transfers out of the harvesting division be made at 200% 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 340,000 pounds of cranberries are harvested during June 2017 and processed into juice.
3.	Why is the sum of the division operating incomes computed in requirement 2 different from Cran Benefit's operating income from harvesting and processing 340,000 pounds of cranberries?
4.	Determine two problems that may arise if Cran Benefit implements the dual transfer prices described in requirement 2.