PROBLEM 2. Transfer Pricing 1

PT. Green Banana Ice is a company with culinary business lines. Currently, the company has two divisions namely the Harvesting Division and the Processing Division. All fruits produced from the Harvesting Division is further processed to make the final product, which is the green banana ice, by the Processing Division and subsequently will be sold to other companies. The annual production capacity of the Harvesting Division is 1,500,000 pounds of bananas. Meanwhile, the Processing Division is currently running under-capacity and thus can process all the fruits produced by the Harvesting Division. With its current production process, the Processing Division produces 1,500 gallons of green banana ice for every 2,000 pounds of bananas. Costs and market prices for the two divisions are as follows:

1. Calculate the annual operating income of PT. Green Banana Ice assuming that the Harvesting Division is operating at its full capacity and the Processing Division is able to further process all the products of Harvesting Division. (5%) 2. PT Green Banana Ices CEO decided to give bonus to the division managers which are equivalent to 2% of operating income of their division. Calculate the annual bonus received by the manager of both divisions using the transfer pricing method as follows: 150% at full cost; and (4%) Market price (4%) 3. Which transfer-pricing method will each division manager choose? (2%) 4. How much is the maximum and minimum transfer price that can be applied by the company if the Harvesting Division: a). operates at full capacity; (2,5%) b). operates under its capacity (2,5%) Please explain.

Harvesting Division $ Processing Division $ Variable Cost (per pound) $ 0,2 $ 0,4 Variable Cost (per gallon) - excluding Transferred-In Cost Fixed Cost (per gallon) $ 0,2 Fixed Cost (per pound)* $ 0,3 *fixed cost at the annual production capacity Market Price of Banana (per $ 0,8 Market Price of Green Banana Ice $ 2 pound) (per pound)