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, Missing 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: Price per Volume Total Price Case 530,000 equivalent cases $ 4,505,000 $ 8.50 1,060,000 7.950.000 7.50 1,590,000 10,653,000 6.70 An equivalent case represents 24 bottles. Container Division's cost analysis indicates that it can produce bottles at these costs: Cost per Volume Total Cost Case 530,000 equivalent cases $3,739,000 $ 7.05 1,060,000 6,548,000 6.18 1,590,000 9,357,000 5.88 These costs include fixed costs of $930,000 and variable costs of $5.30 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: Cost per Volume Total Cost Case 530,000 equivalent cases $1,930,000 $ 3.64 1,060,000 2,730,000 2.58 1,500,000 3,530,000 2.22 The corporate marketing group has furnished the following price demand relationship for the finished product: Total Sales Sales Price per Sales Volume Revenue Case 530,000 equivalent cases $ 11,289,000 $21.30 1,060,000 20,458,000 19.30 1.590,000 25,917.000 16.30 Required: a. Amazon Beverages has used market price-based transfer prices in the past. Using the current market prices and costs and assuming a volume of 1.59 million cases (Enter your answers in thousands of dollars.) a-1. Calculator

Answer 1

a-1 Operating profits = Sales Revenue – Costs

Container Division = 10,653,000-9,357,000

= $1,296,000

Mixing Division = 25,917,000-3,530,000 – 10,653,000

= $11,734,000

Profit for Amazon beverages = 1,296,000+11,734,000

= $13,030,000

	530,000 cases	1,060,000 cases	1,590,000 cases
Profit	766,000	1,402,000	1,296,000
Most profitable is 1,060,000 cases
b-2 Mixing Division
	530,000 cases	1,060,000 cases	1,590,000 cases
Profit	4,854,000	11,180,000	13,030,000
Most profitable is 1,590,000 cases
Amazon Beverages Profit = Profit of Container Division+ Profit of Mixing Division
	530,000 cases	1,060,000 cases	1,590,000 cases
Profit	5,620,000	12,582,000	14,326,000
1,590,000 cases