WestOZ Aluminium Company has two divisions.The Refining Division processes bauxite into alumina for the Smelting Division to convert into aluminium.No inventories exist in either division at the beginning of 2017.During the year,the Refining Division produced 45 000 tonnes of alumina at a cost of $18 000 000.All the alumina was transferred to the Smelting Division,where additional operating costs of $150 per tonne were incurred.The 45 000 tonnes of alumina produced 22 500 tonnes of finished ingots of aluminium which were sold for $38 750 000.
Required:
a.Determine the operating profit for each division if the transfer price from Refining to Smelting is at a cost of $400 per tonne.
b.Determine the operating profit for each division if the transfer price is $500 per tonne.
c.Since the Refining Division sells all of its alumina internally to the Smelting Division,does the Refining manager care what price is selected? Why? Should the Refining Division be a cost centre or a profit centre under the circumstances?
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Question

Quizplus · Accepted Answer

The Answer of WestOZ Aluminium Company has two divisions.The Refining Division processes bauxite into alumina for the Smelting Division to convert into aluminium.No inventories exist in either division at the beginning of 2017.During the year,the Refining Division produced 45 000 tonnes of alumina at a cost of $18 000 000.All the alumina was transferred to the Smelting Division,where additional operating costs of $150 per tonne were incurred.The 45 000 tonnes of alumina produced 22 500 tonnes of finished ingots of aluminium which were sold for $38 750 000.
Required:
a.Determine the operating profit for each division if the transfer price from Refining to Smelting is at a cost of $400 per tonne.
b.Determine the operating profit for each division if the transfer price is $500 per tonne.
c.Since the Refining Division sells all of its alumina internally to the Smelting Division,does the Refining manager care what price is selected? Why? Should the Refining Division be a cost centre or a profit centre under the circumstances?
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WestOZ Aluminium Company Has Two Divisions