Question

Aken Corporation has two divisions. The mining division makes toldine, which is then transferred to the metals division. The toldine is further processed by the metals division and is sold to customers at a price of $ 180 per unit. The mining division is currently required by Aken to transfer its total yearly output of 235,000 units of toldine to the metals division at 125% of full manufacturing cost. Unlimited quantities of toldine can be purchased and sold on the outside market at $ 75 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 30% fixed and 70% variable.
b Manufacturing overhead costs in the metals division are 65% fixed and 35% variable.

Required
1. Calculate the operating incomes for the mining and metals divisions for the 235,000 units of toldine trans-ferred under the following transfer- pricing methods:
(a) Market price and
(b) 125% of full manufacturing cost.
2. Suppose Aken rewards each division manager with a bonus, calculated as 1% of division operating income (if positive). What is the amount of bonus each division manager will receive under the transfer- pricing methods in requirement 1? Which transfer- pricing method will each division manager prefer to use?
3. What arguments would Bryce Jones, manager of the metals division, make to support the transfer- pricing method that heprefers?


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  • CreatedJanuary 15, 2015
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