Wood Inc. manufactures wood poles. Wood has two responsibility centres, harvesting and sawing, which are both evaluated as profit centres. The harvesting division does all the harvesting operations and transfers logs to the 

sawing division, which converts the wood into poles for external clients. When operating at full capacity, the sawing division can convert 11,800 poles. Management is considering replacing this type of wood pole with another type of wood pole that can be sold at a lower price and could allow the firm to operate at full capacity all the time.

 

The director of the sawing division suggested that the maximum price the division can pay for each log from harvesting is $29.00. Following is the information that supports this suggestion:

Price per pole that the client would pay$92

Direct labour costs$36.00

Variable overhead costs 4.00

Fixed overhead costs 8.70

Raw material costs (other than logs) 2.30

= 51.00

Profit margin 12.00

Total costs and profit margin 63.00

Maximum price for a log $29.00

The director of the harvesting division disagrees with selling the logs at a price of $29.00. The division is operating at full capacity and sells logs to external clients for $43.00. Moreover, the director says, "My direct labour costs are $22.50, my variable overhead costs are $4.00, and my fixed overhead costs are $9.30. I can't cut trees for $35.80 and sell them for $29.00."

Calculate the minimum transfer price?

Answer rating: 100% (QA)

Harvesting divisions cost per log Direct labor 2250 Variable overhead 400 Fixed overhead 930 Total c... View the full answer