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Advance costing for management's decisions - Amazon Beverage

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Evaluate Profit Impact of Alternative Transfer Decisions
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 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 a 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 sized demanded
by mixing Division.These competitive prices follow:

Volume Total price Price per case
400,000 equivalent cases $2,400,000 $6.00
800,000 4,000,000 $5.00
1,200,000 6,480,000 $5.40

Note :An equivalent case represents 24 bottles

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

Volume Total cost Cost per case
400,000 equivalent cases $2,400,000 $6.00
800,000 4,000,000 $5.00
1,200,000 5,600,000 $4.67

These costs include fixed costs of $800,000 and variable costs of $4 per equivalent case.These data have caused considerable corporate
discussion as to the proper price to use in the transfer of bottles from Container Divison 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;

Volume Total cost Cost per case
400,000 equivalent cases $1,800,000 $4.50
800,000 2,600,000 $3.25
1,200,000 3,400,000 $2.83

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

Sales Volume Total sales Revenue Sales Price per case

400,000 equivalent cases $8,000,000 $20.00
800,000 14,400,000 $18.00
1,200,000 18,000,000 $15.00

a) Amazon Beverages has used market price transfer prices in the past.USING the current market prices and costs and assuming a volume of 1.2 million cases
calculate operating profits for:
1) container Division
2)Mixing Division
3)Amazon Beverages

b) Is this production and sales level the most profitable volume for:
1) Container Division ?
2)Mixing Division?
3)Amazon Beverages?

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Solution Summary

The solution evaluates Profit Impact of Alternative Transfer Decisions for Amazon Beverages.

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