Amazon Beverages produces and bottles a line of soft drinks

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. 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 Total Price e $3.713.000 7.90 470,000 equivalent cases 1410000 8601,000 An equivalent case represents 24 bottles. Container Division\'s cost analysis indicates that it can produce bottles at these costs: Total Cost $3.079,000 5.288,000O 7.497,000 70.000 equivalent cases 40,000 %655 These costs include fixed costs of $870,000 and variable costs of $4.70 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: 70.000 equivalent cases 940.000 1410.000 Total Cost $1.870,000 .670,000 3.470.000 398 284 The corporate marketing group has funished the following the finished product: relationship for Sales Volume 70.000 equivalent cases 9729.000 20.70 37,000

Solution

a1) OP for Container division = ($6.10 - $5.32) * 1.41m = $1.0998 m a2) OP for Mixing Division = (15.70 - 6.10 - 2.46) * 1.41m = $10.0674 m a3) OP for Amazon Beverages = (15.70 - 5.32 - 2.46) * 1.41m = $11.1672 m b1) OP for container division 470000 cases 940000 cases 1410000 cases OP (7.90-6.55)*0.47m= $0.6345m (6.90 - 5.63)*0.94 = $1.1938 m ($6.10 - $5.32) * 1.41m = $1.0998 m Container division is most profitable at 940000 cases level of production. b2) OP for Mixing division 470000 cases 940000 cases 1410000 cases OP (20.70-7.90-3.98)*0.47m= $4.1454m (18.70 - 6.90-2.84)*0.94 = $8.4224 m ($15.70 - $6.10-2.46) * 1.41m = $10.0674 m Mixing division is most profitable at 1410000 cases level of production. b3) OP for Amazon Braverages 470000 cases 940000 cases 1410000 cases OP (20.70-6.55-3.98)*0.47m= $4.7799m (18.70 -5.63-2.84)*0.94 = $9.6162 m ($15.70 - $5.32-2.46) * 1.41m = $11.1672 m Amazon Braverages is most profitable at 1410000 cases level of production.