Cranergy 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:

Required
1. Compute Cranergy’s operating income from harvesting 420,000 pounds of cranberries during June 2014 and processing them into juice.
2. Cranergy rewards its division managers with a bonus equal to 3% of operating income. Compute the bonus earned by each division manager in June 2014 for each of the following transfer pricing methods:
a. 150% of full cost
b. Market price
3. Which transfer-pricing method will each division manager prefer? How might Cranergy resolve any conflicts that may arise on the issue of transferpricing?

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Harvesting Division Processing Division Fixed cost per pound of cranberries Selling price per pound of cranberries in outside market 50.58 Selling price per gallon of juice 0.50 $2.15 10 26 Fixed cost per galon of juice produced