Reference no: EM133073975

Question - 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 $0.73

Negotiated $0.69

Gallons transferred 277,000

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.

Which of the following statements best describes your results?

a. The operating income of the transportation division will be higher than the operating income of the bottling division under all three transfer pricing systems.

b. The operating income of the transportation division will be higher than the operating income of the bottling division under the cost-based and market-based transfer pricing systems only.

c. The operating income of the transportation division will be higher than the operating income of the bottling division under the cost-based and negotiated transfer pricing systems only.

d. The operating income of the transportation division will be higher than the operating income of the bottling division under the negotiated and market-based transfer pricing systems only.