Question

has two divisions: Bottle Making and Brewing. Each division is evaluated as a profit centre.

Bottle Making Division

The bottle making division makes cases of empty bottles and sells them on both the open market and to the brewing division. Other information is as follows:

Capacity	340,000 cases
Current Production	320,000 cases
Market selling price	$6.00 per case
Variable costs	$4.00 per case (based on current production)
Fixed costs	$1.80 per case (based on current production)
Tax rate	25%

Brewing Division

The brewing division brews and bottles beer. It buys empty bottles from both the bottle making division and the open market. Other information is as follows:

Capacity	300,000 cases
Current Production	260,000 cases
Market selling price	$40.00 per case
Variable cost*	$28.00 per case (based on current production)
Fixed cost	$10.00 per case (based on current production)
Tax rate	20%

      Note: The Variable cost per case includes an estimated cost of $6 per case of bottles

Each of these is a separate situation:

1. What is the minimum transfer price the bottle making division will sell an additional case of bottles to the brewery division? (1/2 mark)

2. What is the maximum transfer price the brewery division will buy an additional case of bottles from the bottling making division? (1/2 mark)

3. Both CRA and the IRS will accept a range of transfer prices between full cost and market price.   What is the optimal transfer price between the bottle making and brewing divisions in order to maximize overall profitability for the entire company? Briefly explain your answer. (1 mark)

4. Current production for the Bottle division is based on estimated sales 170,000 cases on the open market and 150,000 cases to the brewery division. The brewery division would like to purchase an additional 30,000 cases from the bottle division. What is the minimum transfer prices per case the bottle making division will sell the additional 30,000 cases to the brewery division? (2 marks)