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 the 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 the Container Division. The 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:

Volume	Total Price	Price Per Case
570,000 equivalent cases	5,073,000	8.90
1,140,000	9,006,000	7.90
1,710,000	12,141,000	7.10

An equivalent case represents 24 bottles

Container Division's cost analysis indicates that it can produce bottles at these costs:

Volume	Total Price	Price Per Case
570,000 equivalent cases	4,291,000	7.40
1,140,000	7,468,000	6.55
1,710,000	10,717,000	6.27

These costs include fixed costs of $970,000 and variable costs of $5.70 per equivalent case. These data have caused considerable corporate discussion as to the proper price to use in the transfer of bottles from the Container Division to the 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:

Volume	Total Cost	Cost per Case
570,000 equivalent cases	1,970,000	3.46
1,140,000	2,770,000	2.43
1,710,000	3,570,000	2.09

The corporate marketing group has furnished the following price-demand relationship for the finished product:

Sales Volume	Total Sales Revenue	Sales Price per Case
570,000	12,369,000	21.70
1,140,000	22,458,000	19.70
1,710,000	28,557,000	16.70

Amazon Beverages has used market price transfer prices in the past. Using the current market prices and costs and assuming a volume of 1.71 million cases.

1 - Calculate operating profits for Container Division.

2 - Calculate operating profits for Mixing Division.

3 - Calculate operating profits for Amazon Beverages.

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Answer 1

Answers: -

1 - Operating profits for Container Division is 1,424,000

2 - Operating profits for Mixing Division is 12,846,000

3 - Operating profits for Amazon Beverages is 14,270,000

Explanations: -

1.)

Operating profits for Container Division

Revenue	12,141,000 (1,710,000 *7.10)
Cost	10,717,000 (1,710,000*5.70) + 970,000
Profit	1,424,000

2.)

Operating profits for Mixing Division

Revenue	28,557,000 (1,710,000*16.70)
Cost	15,711,000 (12,141,000 +3,570,000)
Profit	12,846,000

3.)

Operating profits for Amazon Beverages

Revenue	28,557,000 (1,710,000*16.70)
Cost	14,287,000 (10,717,000 +3,570,000)
Profit	14,270,000