The Furniture Division of International Woodworking purchases lumber and makes tables, chairs, and other wood furniture. Most of the lumber is purchased from the Port Angeles Mill, also a division of International Woodworking.
The Furniture Division and the Port Angeles Mill are profit centers. The Furniture Division manager proposed a new Danish-designed chair that will sell for $150. The manager wants to purchase the lumber from the Port Angeles Mill. Production of 800 chairs is planned, using capacity in the Furniture Division that is currently idle. The Furniture Division can purchase the lumber for each chair from an outside supplier for $60. International Woodworkers has a policy that internal transfers are priced at variable cost plus allocated fixed costs.

REQUIRED
A. Assume that the Port Angeles Mill has idle capacity and would incur no additional fixed costs to produce the required lumber. Would the Furniture Division manager buy the lumber for the chair from the Port Angeles Mill, given the existing transfer price policy?
Why or why not?
B. Calculate the contribution margin for the company as a whole if the manager decides to buy from the Port Angeles Mill and is able to sell 800 chairs.
C. What transfer price policy would you recommend if the Port Angeles Mill always has idle (excess) capacity? Explain why this transfer price policy provides incentives for the managers to act in the best interests of the company as a whole.
D. Explain how the idle capacity affects the recommendation in part(C).

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Assume the following costs for the production of one chair: Port Angeles Mill Furniture Division Variable cost Allocated fixed cost $40 30 $70 Variable costs: Lumber: Port Angeles Mill Furniture Division variable costs: $70 Full cost Manufacturing Selling 75 10 $155 Total variable cost