Assume that Pat Borges, CEO of Cranergy, had mandated a transfer price equal to 150% of full cost. Now he decides to decentralize some management decisions and sends around a memo that states the following: “Effective immediately, each division of Cranergy is free to make its own decisions regarding the purchase of direct materials and the sale of finished products.”

In Problem 22-29, 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. Give an example of a goal-congruence problem that will arise if Cranergy continues to use a transfer price of 150% of full cost and Borges’s decentralization policy is adopted.
2. Borges feels that a dual transfer-pricing policy will improve goal congruence. He suggests that transfers out of the harvesting division be made at 150% of full cost and transfers into the processing division be made at market price. Compute the operating income of each division under this dual transfer-pricing method when 420,000 pounds of cranberries are harvested during June 2014 and processed into juice.
3. Why is the sum of the division operating incomes computed in requirement 2 different from Cranergy’s operating income from harvesting and processing 420,000 pounds of cranberries?
4. Suggest two problems that may arise if Cranergy implements the dual transfer prices described in requirement2.

Transcribed Image Text:

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