Wood Inc. manufactures wood poles. Wood has two responsibility centres, harvesting and sawing, which are both evaluated
Question:
The director of the sawing division suggested that the maximum price the division can pay for each log from harvesting is $29.50. Following is the information that supports this suggestion:
The director of the harvesting division disagrees with selling the logs at a price of $29.50. The division is operating at full capacity and sells logs to external clients for $44.50. Moreover, the director says, "My direct labour costs are $22.50, my variable overhead costs are $4.50, and my fixed overhead costs are $9.00. I can't cut trees for $36.00 and sell them for $29.50."
Instructions
(a) Assuming production is at full capacity, determine whether Wood Inc., as a whole, would make a higher profit if logs were transferred to the sawing division for $29.50 per log. Show your calculations.
(b) Explain the effect of transferring the logs at $29.50 per log on each division's profit performance.
(c) Calculate the minimum and maximum transfer prices that could be used, and recommend an appropriate transfer price. Explain your answer.
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