Q3

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 orde 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 transfe pricing structure. These various transfer prices are listed below. Great Springs Bottled Water Company Income Statement (Cost-based) Month Ending August 31, 20xx \begin{tabular}{lrc} & Transportation & Bottling \\ \hline Sales & $+$286,000 \\ Cost of goods sold & $+ \\ Gross profit & $490 \\ \hline \end{tabular} Expenses: Fuel/utility expense $16,000$3,300 Wages expense 43,10057,300 Costs allocated from corporate Total expenses Operating income/(loss) in percentage \begin{tabular}{rr} 17,236 & 15,000 \\ \hline$76,336 & $75,600 \\ \hline$% & \\ \hline% \end{tabular} Great Springs Bottled Water Company Income Statement (Market-based) Month Ending August 31, 20xx \begin{tabular}{lcc} \hline & Transportation & Bottling \\ \hline Sales & $286,000 \\ Cost of goods sold \\ Gross profit & $%+$290 \\ \hline \end{tabular} Expenses: Fuel/utility expense $16,000$3,300 Wages expense 43,10057,300 Costs allocated from corporate Total expenses \begin{tabular}{rr} 17,236 & 15,000 \\ \hline$76,336 & $75,600 \\ \hline \end{tabular} Operating income/(loss) in dollars Operating income/(loss) in percentage Great Springs Bottled Water Company Income Statement (Negotiated) Month Ending August 31, 20xx \begin{tabular}{lrr} \hline & Transportation & Bottling \\ \hline Sales & $+$286,000 \\ Cost of goods sold & $$2,490 \\ Gross profit & $ \\ \hline \end{tabular} Expenses: Fuel/utility expense Wages expense Costs allocated from corporate Total expenses Operating income/(loss) in dollars Operating income/(loss) in percentage 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