Love, Inc. manufactures a line of men's colognes and aftershave lotions. The manufacturing process is basically a series of mixing operations, with the addition of certain aromatic and colouring ingredients. The finished product is pack- aged in a company-produced glass bottle and packed in cases of six bottles.
Top management feels that the sale of its product is heavily influenced by the appearance and appeal of the bottle and has therefore had managers focus on the bottle-production process. This has resulted in the development of certain unique bottle-production processes that management is quite proud of.
The two areas (perfume production and bottle manufacture) have evolved over the years almost independently; in fact, a rivalry has developed between management personnel as to which division is more important to the company. This attitude is probably intensified because the bottle manufacturing plant was purchased as a whole company 10 years ago and there has been no real exchange of management personnel or ideas (except at the top corporate level).
Since the acquisition, all bottle production has been used by the perfume manufacturing plant. Each area is considered a separate profit centre and evaluated as such. As the new corporate controller, you are responsible for determining a proper transfer value to use in crediting the bottle production profit centre and in debiting the perfume packaging profit centre.
At your request, the bottle division's general manager has asked certain other bottle manufacturers to quote a price for the quantity and sizes of bottles that the perfume division needs. These competitive prices are as follows:

An analysis of the bottle plant indicates that it can produce bottles at the following costs:

These figures have resulted in considerable corporate discussion about the proper value to use in the transfer of bottles to the perfume division. Discussions are especially hot because a significant portion of each division manager's income is an incentive bonus that is based on his or her subsidiary's profit. The perfume production division has the following costs in addition to the bottle costs:

After considerable analysis, the marketing research department has given you the following price-demand relationship for the finished product:

Instructions
(a) Love, Inc. has used market-based transfer prices in the past. Using current market prices and costs, and assuming a volume of 6 million cases, calculate the income for (1) the bottle division, (2) the perfume division, and (3) the company.
(b) Are these production and sales levels the most profitable volumes for (1) the bottle division, (2) the perfume division, and (3) the company? Explain your answer.

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Volume (equivalent cases)* 2,000,000 4,000,000 6,000,000 Total Price $ 4,000,000 7,000,000 10,020,000 Price per Case $2.00 1.75 1.67 Volume (equivalent cases) 2,000,000 4,000,000 6,000,000 Total Price $3,200,000 5,200,000 7,200,000 Price per Case* $1.60 1.30 1.20 Volume (cases) 2,000,000 4,000,000 6,000,000 Total Cost $16,400,000 32,400,000 48,420,000 Cost per Case $8.20 8.10 8.07 Sales Volume (cases) 2,000,000 4,000,000 6,000,000 Total Sales Revenue $25,000,000 45,600,000 63,900,000 Sales Price per Case $12.50 11.40 10.65