Alsation Ltd. has two divisions: Machining and Assembly. The Machining Division prepares the raw materials into component parts and the Assembly Division assembles the components into finished product. No inventories exist in either division at the beginning of the year. During the year the Machining Division prepared 80,000 square metres of sheet metal at a cost of $480,000. All production was transferred to the Assembly Division where the metal was converted into 800,000 units of finished product at an additional costs of $5 per unit. The 800,000 units were sold for $2,000,000.
Required:
a. Determine the operating income for each division if the transfer price from Machining to Assembly is at cost, $6/square metre.
b. Determine the operating income for each division if the transfer price is $5/square metre.
c. Since the Machining Division has all of its sales internally to the Assembly Division, does the manager care what price is selected? Why? Should the Machining Division be a cost centre or a profit centre under the circumstances?

Question

Quizplus · Accepted Answer

The Answer of Alsation Ltd. has two divisions: Machining and Assembly. The Machining Division prepares the raw materials into component parts and the Assembly Division assembles the components into finished product. No inventories exist in either division at the beginning of the year. During the year the Machining Division prepared 80,000 square metres of sheet metal at a cost of $480,000. All production was transferred to the Assembly Division where the metal was converted into 800,000 units of finished product at an additional costs of $5 per unit. The 800,000 units were sold for $2,000,000.
Required:
a. Determine the operating income for each division if the transfer price from Machining to Assembly is at cost, $6/square metre.
b. Determine the operating income for each division if the transfer price is $5/square metre.
c. Since the Machining Division has all of its sales internally to the Assembly Division, does the manager care what price is selected? Why? Should the Machining Division be a cost centre or a profit centre under the circumstances?