Coco Co. produces two products in the following two decentralised departments: The Processing Department: every 1 kg of raw cocoa beans is roasted and refined into cocoa solids without any weight loss at a variable cost of $21. Cocoa solids can be sold to the market at $28 per kg. The Grinding Department: every 1 kg of cocoa solids is grinded into 1 kg of cocoa powder at a variable cost of $2.50 plus the cost of 1 kg of cocoa solids. Cocoa powder is sold at $35 per kg in orders of 1-kg packages. The department has only one grinding machine.

Required: The company's internal transfers of cocoa solids from the Processing Department to the Grinding Department are made at 120% of variable cost.

i. Compute the transfer price. (1 mark)

ii. What's the operating income from the sale of one kilogram of the product if Coco Co. does not process cocoa solids into cocoa powder and sell the cocoa solids to the market? (2 marks)

iii. What's the operating income from the sale of one kilogram of the product if Coco co. internally process cocoa beans to cocoa solids and then to cocoa powder, and sell the cocoa powder to the market? (2 marks)

iv. Does transfer price promote goal congruence in Coco Co.? Why or why not? (3.5) marks)

Answer rating: 100% (QA)

Answer i Transfer Price Calculation The transfer price is 120 of the variable cost of producing 1 kg of cocoa solids in the Processing Department Vari... View the full answer