Chapter 22, Problem 22.28P

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:

1. A. Compute Cran Health’s operating income from harvesting 480,000 pounds of cranberries during June 2017 and processing them into juice.
2. B. 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:
   1. a. 225% of full cost
   2. b. Market price
3. C. 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?