Top juice is a company that operates two divisions, a harvesting division and a processing division. Currently, all the harvestings output is converted into cranberry juice by the processing division and the juice is being sold to large beverage companies that produce cranberry juice blends. The processing division produces 500 gallons of juice per 1,000 pounds of cranberries. It is expected that in May, 400,000 pounds of cranberries will be harvested and transformed into juice, hence, 200,000 gallons of juice Will be made.

Cost and market price data for the two divisions are as follow:

Harvesting Division

Variable cost per pound of cranberries is $0.10

Fixed cost per pound of cranberries is $0.25

Selling Price per pound of cranberries in outside market is $0.60

Processing Division

Variable processing cost per gallon of juice produced is $0.20

Fixed cost per gallon of juice produced is $0.40

Selling price per gallon of juice is $2.10

Required:

1. Compute the divisions operating incomes, using the contribution format income statement in both cases:

1. If the transfer price applied is the market price.
2. If the transfer price is based on a 200% of full cost.

2. If The company rewards its division managers with a bonus equal to 5% of Operating Income, each manager will prefer which method? Explain by showing calculations.