✌️✌️Lucky Carrot ✌️✌️

Question

Answer

Step 0

Step 1
The Transfer Pricing refers to the price at which the sale of the intermediate product from one division to the other division of the firm is
made. The transfer price can be set at the market price or at a premium to the cost of the intermediate product.

Step 2
1)

Calculate the operation income of CH from harvesting 480,000 pounds of cranberries during June 2017 and processing them into juice as
follows:

Therefore, operation income of CH from harvesting 480,000 pounds of cranberries during June 2017 and processing them into juice
is

Step 3
Working note:

1.

Calculate the amounts in the above table as follows:

2.

The processing division has a yield of 500 gallons of juice per 1,000 pounds of cranberries. Thus, yield of 480,000 pounds of cranberries can
be calculated by multiplying 480,000 by 500 and dividing the result by 1,000.

Step 4
2)

a)

Calculate division manager's commission for harvesting division as follows:

Therefore, division manager's commission for harvesting division is

Working note:

Calculate the amounts in the above table as follows:

Step 5
Calculate division manager's commission for processing division as follows:
Therefore, division manager's commission for processing division is

Working note:

Calculate the amounts in the above table as follows:

Step 6
b)

Calculate division manager's commission for harvesting and processing division as follows:

Therefore, division manager's commission for harvesting and processing division is

Working note:

Calculate the amounts in the above table as follows:

Step 7
3)

The transfer price preferred by the processing division manager is the one based on market price as the manager derives the maximum
bonuse from this method.

The transfer price preferred by the harvesting division manager is the one based on 225% of full cost price as the manager derives the
maximum bonuses from this method.

There can be conflict in terms of which transfer pricing to implement as there can be lack of consensus as the method profitable to one
division might not be profitable to the other division. The conflict can be resolved by negotiating a mutual consensus transfer price that
would be beneficial to both the divisions and the organization as a whole.