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Homework answers / question archive / Management of Great Springs Bottled Water Company has asked you, the controller, to develop a transfer pricing system for the company
Management of Great Springs Bottled Water Company has asked you, the controller, to develop a transfer pricing system for the company. The Transportation Department of the company sells all of its product to the Bottling Department of the company. Thus the Transportation Department's sales become the Bottling Department's cost of goods sold. In order to determine an optimal transfer pricing system, management would like you to demonstrate what an income statement would look like under a cost, market, and negotiated transfer pricing structure. These various transfer prices are listed below. Cost-based $0.61 Market-based Negotiated Gallons transferred 278,000 Prepare an income statement for each of the transfer prices by filling in the missing numbers in the provided income statement based on each transfer price and calculate the operating income/loss percentage. Round your answers to the nearest whole number. Great Springs Bottled Water Company Income Statement (Cost-based) Month Ending August 31, 20xx Transportation Bottling 169,580 $285,000 Cost of goods sold 88,182 169,580 x Gross profit 81,398 $115,420 Sales $14,000 $3,300 Expenses: Fuel/utility expense Wages expense Costs allocated from corporate 43,080 57.100 17,235 14,000 Total expenses 574,315 $74,400 $ 39,920 ? Operating income/loss) in dollars 7,061 X Operating income/(loss) in percentage 4 % 19 X %
Great Springs Bottled Water Company Income Statement (Market-based) Month Ending August 31, 20xx Transportation 205,720 Bottling Sales $285,000 Cost of goods sold 88,182 205,720 X Gross profit 117,538 79, 280 Expenses: Fuel/utility expense $14,000 $3,300 43,080 57,100 Wages expense Costs allocated from corporate 17,235 14,000 Total expenses 574,315 574,400 43,201 X 3,780 X Operating income/loss) in dollars Operating income/(loss) in percentage 21 1 X % Great Springs Bottled Water Company Income Statement (Negotiated) Month Ending August 31, 20xx Transportation 194,600 Bottling $285,000 Sales Cost of goods sold 88,182 194,600 X Gross profit 106,419 x $ 90,400 $14,000 Expenses: Fuel/utility expense Wages expense Costs allocated from corporate $3,300 57.100 43,080 17,235 14,000 Total expenses 574,315 $74,400 Operating income/(loss) in dollars 32,081 ? 14,900 ? Operating income/(loss) in percentage 16 % 5 X %
Answer :
Great springs Bottled Water company | ||
Income statement ( Cost based ) | ||
Month ended august 31 | ||
Transportation | Bottling | |
Sales | 169580 | 285000 |
Cost of goods sold | 88182 | 169580 |
Gross profit | 81398 | 115420 |
Expenses : | ||
Fuel / Utility expense | 14000 | 3300 |
Wages expense | 43080 | 57100 |
Costs allocated from corporate | 17235 | 14000 |
Total expenses | 74315 | 74400 |
Operating income / loss in dollars | 7083 | 41020 |
( Gross profit - total expenses) | ||
Operating Income / loss % | 4% | 14% |
( Operating income *100 / sales) | ||
Great springs Bottled Water company | ||
Income statement ( Market based ) | ||
Month ended august 31 | ||
Transportation | Bottling | |
Sales | 205720 | 285000 |
Cost of goods sold | 88182 | 205720 |
Gross profit | 117538 | 79280 |
Expenses : | ||
Fuel / Utility expense | 14000 | 3300 |
Wages expense | 43080 | 57100 |
Costs allocated from corporate | 17235 | 14000 |
Total expenses | 74315 | 74400 |
Operating income / loss in dollars | 43223 | 4880 |
( Gross profit - total expenses) | ||
Operating Income / loss % | 21% | 2% |
( Operating income *100 / sales) | ||
Great springs Bottled Water company | ||
Income statement (Negotiated) | ||
Month ended august 31 | ||
Transportation | Bottling | |
Sales | 194600 | 285000 |
Cost of goods sold | 88182 | 194600 |
Gross profit | 106418 | 90400 |
Expenses : | ||
Fuel / Utility expense | 14000 | 3300 |
Wages expense | 43080 | 57100 |
Costs allocated from corporate | 17235 | 14000 |
Total expenses | 74315 | 74400 |
Operating income / loss in dollars | 32103 | 16000 |
( Gross profit - total expenses) | ||
Operating Income / loss % | 16% | 6% |
( Operating income *100 / sales) |
For understanding :
Please note :
In cost based : In bottling , when Gross profit of $ 115420 is correct and sales is given $ 285000 , and cost of goods sold = Sales - Gross profit , Therefore cost of goods sold has to be = 285000 -115420 = 169580
In market based : In bottling , when Gross profit of $ 79280 is correct and sales is given $ 285000 , and cost of goods sold = Sales - Gross profit , Therefore cost of goods sold has to be = 285000 -79280 = 205720
In Negotiated : In bottling , when Gross profit of $ 90400 is correct and sales is given $ 285000 , and cost of goods sold = Sales - Gross profit , Therefore cost of goods sold has to be = 285000 -90400 = 194600