Bubbling Springs,Inc. ,produces bottled drinks.Division #1 acquires the water,adds carbonation,and sells it in bulk quantities to Division # 2 of Spring Waters and to outside buyers.Division # 2 buys carbonated water in bulk,adds flavoring,bottles it,and sells it.Last year,Division #1 produced 1,500,000 gallons,of which it sold 1,300,000 gallons to the Division # 2 and the remaining 200,000 gallons to outsiders for $0.40 per gallon.Division #2 processed the 1,300,000 gallons,which it sold for $1,500,000.Division #1's variable costs were $440,000 and its fixed costs were $120,000.The Division # 2 incurred an additional variable cost of $320,000 and $200,000 of fixed costs.Both divisions operated below capacity.
Required:
a.Prepare division income statements assuming the transfer price is at the external market price of $0.40 per gallon.
b.Repeat part a.assuming a negotiated transfer price of $0.30 per gallon is used.
c.Respond to the statement: "The choice of a particular transfer price is immaterial to the company as a whole."

Question

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The Answer of Bubbling Springs,Inc. ,produces bottled drinks.Division #1 acquires the water,adds carbonation,and sells it in bulk quantities to Division # 2 of Spring Waters and to outside buyers.Division # 2 buys carbonated water in bulk,adds flavoring,bottles it,and sells it.Last year,Division #1 produced 1,500,000 gallons,of which it sold 1,300,000 gallons to the Division # 2 and the remaining 200,000 gallons to outsiders for $0.40 per gallon.Division #2 processed the 1,300,000 gallons,which it sold for $1,500,000.Division #1's variable costs were $440,000 and its fixed costs were $120,000.The Division # 2 incurred an additional variable cost of $320,000 and $200,000 of fixed costs.Both divisions operated below capacity.
Required:
a.Prepare division income statements assuming the transfer price is at the external market price of $0.40 per gallon.
b.Repeat part a.assuming a negotiated transfer price of $0.30 per gallon is used.
c.Respond to the statement: "The choice of a particular transfer price is immaterial to the company as a whole."