Solco Industries is a decentralized company with two divisions: mining and processing. They are both evaluated as
Question:
The processing division has just received an order from International Diamonds Co. for 300,000 kg of polished diamonds at a price of $175 per kilogram. Solco has a policy that prohibits selling any product below total cost. The total cost of a kilogram of raw diamonds in the mining division is $60, of which 25% is company fixed costs.
Instructions
(a) Would Solco as a whole benefit if the raw diamonds were transferred to the processing division at $60 per kilogram to fill the order from International Diamonds? Show all calculations.
(b) Briefly explain whether anything is wrong with Solco's policy that no product should be sold below total cost.
(c) Calculate the minimum and maximum transfer prices that could be used.
(d) Recommend an appropriate transfer price for raw diamonds sold by the mining division to the processing division. Explain your answer.
(e) If the mining division was not operating at full capacity, would your answer in part (d) be different
Step by Step Answer:
Managerial Accounting Tools for Business Decision Making
ISBN: 978-1118856994
4th Canadian edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Ibrahim M. Aly