Your company produces cookies in a two-step process. The Mixing Division prepares the cookie dough and transfers it to the Baking Division, which bakes the cookies and packs all finished cookies for shipment.

At a recent meeting of your company's board of directors, the manager of the Baking Department made this statement: "That Mixing Division is robbing us blind!" Because of the board's concern about this statement, the company controller gathered the following data for the past year:

During the year, the two divisions completed and transferred or shipped 200,000 regular cookie boxes and 150,000 deluxe cookie boxes. Transfer prices used by the Mixing Division were as follows:
Regular ................$3.50
Deluxe...................6.00
The regular box wholesales for $8.60 and the deluxe box for $22.00. The company uses a predetermined formula to allocate administrative costs to the divisions. Management has indicated that the transfer price should include a 20 percent profit factor on total division costs.
Instructions
Prepare a performance report on the Mixing Division
Prepare a performance report on the Baking Division
Compute each division's rate of return on controllable costs and on total division costs.
Do you agree with the statement made by the manager of the Baking Division? Explain your response.
What procedures would you recommend to the board ofdirectors?

Transcribed Image Text:

Mixing Division Baking Division Sales $700,000 Regular Deluxe Direct Materials S1,720,000 900,000 3,300,000 Cookie Dough (from Mixing Division) 1600,000 Cookie ingredients 360,000 660,000 1,560,000 540,000 240,000 210,000 372,000 108,000 Box inserts Boxes Direct labor Variable overheacd Fixed divisional overhead -avoidable Selling and general operating expenses Company administrative expenses 480.000 90.000 150,000 132.000 84,000