Reference no: EM132613059

Big Sky is a local brewhouse that operates two business units, the Brewery and the Pub, in the same shared facility. All kegs of beer brewed in the Brewery are transferred to the Pub to be served to customers. The General Manager, responsible for both units, set the beer kegs transfer value to the Pub at the Brewery's marginal or variable standard cost.

• The standard cost for brewing ingredients, labour and variable processing costs is $30 per keg. The actual cost of brewing a keg varies depending on the market cost of the ingredients when delivered and used. The brewing staffing are all full time and the Brewery's payroll labour costs are fixed regardless of the volume of kegs produced up to capacity.
• The Brewery's capacity is 5,000 kegs per month and currently the Pub is producing 3,000 kegs on average per month with some seasonal variation.

The Brewery manager is confident he could sell any or all of their beer to external customers (other pubs) at $60 per keg. He estimates he would incur an average delivery cost of $5 per keg from a third-party delivery service.

The manager of the Brewery is assessed based on his actual production performance with his actual fixed costs compared to his budget and his actual variable costs compared to his standard costs. The brewery receives a credit for the transfer of the kegs at standard cost to the Pub. The manager of the Pub is assessed based on the pub's actual sales performance. Sales results are compared to a flexible budget for the volume sold. Her only variable costs are the beer product costs which are the actual volumes transferred in at standard cost so there is no price variance on the beer cost. The other pub unit operating costs are compared to monthly budgeted costs.

Required:

Question 1. What is the appropriate responsibility centre classification (Cost center, Profit center, or Investment center) for a) the Brewery business unit and b) the Pub business unit? Explain why you chose the classification for each.

Question 2. The Brewery manager has requested he be allowed to increase his production volume and sell any excess kegs externally. As the General Manager, you have the following choice: a. Allow the Brewery unit to get credit for the extra external revenue and incur the delivery costs b. Have the new external sales and costs processed through the Pub unit using the existing marginal cost keg transfer price. What are the key performance management considerations of each option for the two business unit managers?