Blue Ribbon Fisheries is a fishing company located on the Canadian Pacific coast. It has three divisions:
a. Harvesting-operates a fleet of 20 trawling vessels.
b. Processing-processes the raw fish into fillets.
c. Marketing-packages fillets in two-kilogram packets that are sold to wholesale distributors at $15 each on average.
The Processing Division has a yield of 500 kilograms of processed fish fillets from 1,000 kilograms of raw fish provided by the Harvesting Division. The Marketing Division has a yield of 300 two-kilogram packets from every 500 kilograms of processed fish fillets provided by the Processing Division (the weight of the packaging material is included in the two kilogram weight). Cost data for each division are as follows:
Fish Harvesting Division
Variable costs per kilogram of raw fish........... $0.24
Fixed costs per kilogram of raw fish........... $0.48
Fish Processing Division
Variable costs per kilogram of processed fish........ $0.96
Fixed costs per kilogram of processed fish........ $0.72
Fish Marketing Division
Variable costs per two-kilogram packet........... $0.36
Fixed costs per two-kilogram packet........... $0.84
Fixed costs per unit are based on the estimated quantity of raw fish, processed fish, and two-kilogram packets to be produced during the current fishing season.
Blue Ribbon Fisheries has chosen to process internally all raw fish brought in by the Harvesting Division. Other fish processors on the Pacific Coast purchase raw fish from boat operators at $1.70 per kilogram on average. Blue Ribbon has also chosen to process internally all fish fillets into the two-kilogram packets sold by the Marketing Division. Several fish mar keting companies on the Pacific Coast purchase fish fillets at $7 per kilogram on average.
REQUIRED
1. Compute the overall operating income to Blue Ribbon Fisheries of harvesting 1,000 kilo grams of raw fish, processing it into fillets, and then selling it in two-kilogram packets.
2. Compute the transfer prices that will be used for internal transfers (i) from the Harvesting Division to the Processing Division and (ii) from the Processing Division to the Marketing Division under each of the following transfer-pricing methods:
a. 200% of variable costs. Variable costs are the costs of the transferred-in product (if any) plus the division's own variable costs.
b. 150% of full costs. Full costs are the costs of the transferred-in product (if any) plus the division's own variable and fixed costs.
c. Market price.
3. Blue Ribbon Fisheries rewards each division manager with a bonus, calculated as 1% of division operating income (if positive). What is the amount of the bonus that will be paid to each division manager under each of the three transfer-pricing methods in requirement 2? Which transfer-pricing method will each division manager prefer to use?