Ajax Corporation has two divisions. The Mining Division makes toldine, which is then transferred to the Metals
Question:
Division and sold to customers at a price of $150 per unit. The Mining Division is currently required by Ajax to transfer its total yearly output of 200,000 units of toldine to the Metals
Division at 110% of full manufacturing cost. Unlimited quantities of toldine can be purchased and sold on the outside market at $90 per unit.
The following table gives the manufacturing cost per unit in the Mining and Metals divisions for 2013:
a Manufacturing overhead costs in the Mining Division are 25% fixed and 75% variable.
b Manufacturing overhead costs in the Metals Division are 60% fixed and 40% variable.
REQUIRED
1. Calculate the operating incomes for the Mining and Metals divisions for the 200,000 units of toldine transferred under the following transfer-pricing methods: (a) market price and
(b) 110% of full manufacturing cost.
2. Suppose Ajax rewards each division manager with a bonus, calculated as 1% of division operating income (if positive). What is the amount of bonus that will be paid to each division manager under the transfer-pricing methods in requirement 1? Which transfer- pricing method will each division manager prefer to use?
3. What arguments would Brian Jones, manager of the Mining Division, make to support the transfer-pricing method that he prefers?
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Step by Step Answer:
Cost Accounting A Managerial Emphasis
ISBN: 978-0133392883
6th Canadian edition
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ