Amazon Beverages produces and bottles a line of soft drinks using exotic fruits

Question

Amazon Beverages produces and bottles a line of soft drinks using exotic fruits from Latin America and Asia. The manufacturing process entails mixing and adding juices and coloring ingredients at the bottling plant, which is a part of Mixing Division. The finished product is packaged in a company-produced glass bottle and packed in cases of 24 bottles each Because the appearance of the bottle heavily influences sales volume, Amazon developed a unique bottle production process at the company's container plant, which is a part of Container Division. Mixing Division uses all of the container plant's production. Each division (Mixing and Container) is considered a separate profit center and evaluated as such. As the new corporate controller, you are responsible for determining the proper transfer price to use for the bottles produced for Mixing Division At your request, Container Division's general manager asked other bottle manufacturers to quote a price for the number and sizes demanded by Mixing Division. These competitive prices follow Total Price Case $3.959.000 810 6,958,000 490.000 equivalent cases 1.470,000 An equivalent case represents 24 bottles. Container Division's cost analysis indicates that it can produce bottles at these costs: 490,000 equivalent eases 00.000 1,470,000 53,291,000 5,0 2,000 6.72 581 5.51 These costs include fixed costs of $890,000 and variable costs of $4.90 per equivalent case. These data have caused considerable corporate discussion as to the proper price to use in the transfer of bottles from Container Division to Mixing Division. This interest is heightened because a significant portion of a division manager's income is an incentive bonus based on profit center results. Mixing Division has the following costs in addition to the bottle costs 490,000 equivalent eases 80,000 1,470,000 Total Cost 51,B90,000 2,690,00 3,490,00 3.B6 2.37 The corporate marketing group has furnished the following price-demand relationship for the finished product: 10,241,000 18,522.000 90,000 equivalent cases 80,000 1.470,000 18.90 15.90

Explanation / Answer

Volume = 1.47 million cases

(a1) Operating Profit for Container Division:-

Transfer Price = Market Price (1470000 * 6.30)

9261000

(-) Variable cost (1470000 * 4.90)

7203000

(-) Fixed Cost

890000

Operating Profit

1168000

(a2) Operating Profit for Mixing Division:-

Sale Value

23373000

(-) Mixing Dept own cost

3490000

(-) Container cost (Transfer Price)

9261000

Operating Profit

10622000

(a3) Operating Profit for Amazon Beverages:-

Sale Value

23373000

(-) Container Dept cost

8093000

(-) Mixing Dept own cost

3490000

Operating Profit

11790000

(b1) Operating Profit of Container Dept :-

490000

980000

1470000

Transfer Price = Market Price (1470000 * 6.30)

3969000

6958000

9261000

(-) Cost

3291000

5692000

8093000

Operating Profit

678000

1266000

1168000

980000 volume is most profitable for container Dept

(b2) Operating Profit of Mixing Dept :-

490000

980000

1470000

Sale Value

10241000

18522000

23373000

(-) Mixing Dept own cost

1890000

2690000

3490000

(-) Container cost (Transfer Price)

3969000

6958000

9261000

Operating Profit

4382000

8874000

10622000

1470000 volume is most profitable for Mixing Dept

(b2) Operating Profit of Amazon Beverages:-

490000

980000

1470000

Sale Value

10241000

18522000

23373000

(-) Container Dept cost

3291000

5692000

8093000

(-) Mixing Dept own cost

1890000

2690000

3490000

Operating Profit

5060000

10140000

11790000

1470000 volume is most profitable for Amazon Beverages Dept

Transfer Price = Market Price (1470000 * 6.30)

9261000

(-) Variable cost (1470000 * 4.90)

7203000

(-) Fixed Cost

890000

Operating Profit

1168000

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