Home Insert Page Layout Formulas Data View Review в Harvesting Division 2 Variable cost per pound of cranberries 3 Fixed cost per pound of cranberries 4 Selling price per pound of cranberries in outside market Processing Division |Variable processing cost per gallon of juice produced Fixed cost per gallon of juice produced Selling price per gallon of juice $0.10 $0.18 $0.30 $0.68 $2.45
Cran Health Products is a cranberry cooperative that operates two divisions, a harvesting division and a processing division. Currently, all of harvesting’s output is converted into cranberry juice by the processing division, and the juice is sold to large beverage companies that produce cranberry juice blends. The processing division has a yield of 500 gallons of juice per 1,000 pounds of cranberries. Cost and market price data for the two divisions are as follows:
Assume that Pat Borges, CEO of Cran Health, had mandated a transfer price equal to 225% of full cost. Now he decides to decentralize some management decisions and sends around a memo that states the following: “Effective immediately, each division of Cran Health is free to make its own decisions regarding the purchase of direct materials and the sale of finished products.”
Q. Borges feels that a dual transfer-pricing policy will improve goal congruence. He suggests that transfers out of the harvesting division be made at 225% of full cost and transfers into the processing division be made at market price. Compute the operating income of each division under this dual transfer-pricing method when 480,000 pounds of cranberries are harvested during June 2017 and processed into juice.
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