QUESTION 5 (10 Marks - Suggested time 35 minutes)

QUESTION 5 (10 Marks - Suggested time 35 minutes) Consider the following information: Currently, all of the harvesting Division's output is converted into juice by the Processing Division, and the juice is sold to large beverage companies that produce juice blends for resale. The Processing Division has a yield of 500 litres (Ltr) of juice per 1,000 kilograms of fruit. There are no shipping or marketing cost savings when transferring fruit internally (as compared to acquiring fruit from external suppliers). Cost and market price data for the two divisions are as follows: 200% of Full Costs Market Price Transfer price per kilo ((A$0. 10 + A$0.25) x 2) 0.70 I ranster price per kilo (A$0.60) 0.60 1. Harvesting Division $ Revenues (400,000 kg x A$0.70) 280,000 Revenues (A$0.60) 240,000 Costs Division variable costs (400,000 kg x A$0.10 per kg) 40,000 40,000 Division fixed costs (400,000 kg x A$0.25 per kg) 100,000 100.000 Total division costs 140,000 140.000 Division operating profit 40,000 100,000 Harvesting Division manager's bonus (5% of operating profit) 7,000 5,000 2. Processing Division Revenues (200,000 Ltr x A$2.10 per L) 420,000 120,000 Costs Transferred-in costs 280,000 240,000 Division variable costs (200,000 Ltr x A$0.20 per L) 40,000 40,000 Division fixed costs (200,000 Ltr x A$0.40 per L) 80,000 80,000 Total division costs 400,000 360,000 Division operating profit 20,000 60,000 Processing Division manager's bonus (5% of operating profit) 1,000 3.000 a) Discuss the goal congruence problem(s) that will arise if the company continues to mandate the use a transfer price of 200% of full cost. (4 marks - Suggested time 15 minutes) b) Discuss the implications of introducing each of the following transfer pricing methods; market price transfer pricing policy II. negotiated (between divisions) transfer pricing policy III. dual transfer-pricing policy (i.e. transfers out of harvesting are made at 200% and transfers into processing are made at market price) (6 marks - Suggested time 20 minutes) (TOTAL 10 MARKS)