Effect of alternative transfer-pricing methods on division operating income. Cran Health Products is a cranberry cooperative that operates two divisions, a harvesting division and a processing division. Currently, all of harvesting’soutput 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: HomePage LayoutFormulasDataInsertReviewViewBHarvesting DivisionVariable cost per pound of cranberriesProcessing DivisionVariable processing cost per gallon of juice producedFixed cost per gallon of juice producedSelling price per gallon of juice$0.18$0.35$2.45$0.103 Fixed cost per pound of cranberries4 Selling price per pound of cranberries in outside market$0.30$0.681. Compute Cran Health's operating income from harvesting 480,000 pounds of cranberries during June2017 and processing them into juice.2. Cran Health rewards its division managers with a bonus equal to 6% of operating income. Compute thebonus earned by each division manager in June 2017 for each of the following transfer-pricing methods:a. 225% of full costb. Market price3. Which transfer-pricing method will each division manager prefer? How might Cran Health resolve anyconflicts that may arise on the issue of transfer pricing?Required

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Effect of alternative transfer-pricing methods on division operating income. 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:

Home
Page Layout
Formulas
Data
Insert
Review
View
B
Harvesting Division
Variable cost per pound of cranberries
Processing Division
Variable processing cost per gallon of juice produced
Fixed cost per gallon of juice produced
Selling price per gallon of juice
$0.18
$0.35
$2.45
$0.10
3 Fixed cost per pound of cranberries
4 Selling price per pound of cranberries in outside market
$0.30
$0.68
1. Compute Cran Health's operating income from harvesting 480,000 pounds of cranberries during June
2017 and processing them into juice.
2. Cran Health rewards its division managers with a bonus equal to 6% of operating income. Compute the
bonus earned by each division manager in June 2017 for each of the following transfer-pricing methods:
a. 225% of full cost
b. Market price
3. Which transfer-pricing method will each division manager prefer? How might Cran Health resolve any
conflicts that may arise on the issue of transfer pricing?
Required

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