Sandra's Sheet Metal Company has two divisions. The Raw Material Division prepares sheet metal at its warehouse facility. The Fabrication Division prepares the cut sheet metal into finished products for the air conditioning industry. No inventories exist in either division at the beginning of 2015. During the year, the Raw Material Division prepared 450,000 square metres of sheet metal at a cost of $1,800,000. All the sheet metal was transferred to the Fabrication Division, where additional operating costs of $1.50 per square metre were incurred. The 450,000 square metres of finished fabricated sheet metal products were sold for $3,875,000.
Required:
a. Determine the operating income for each division if the transfer price from Raw Material to Fabrication is at a cost of $4 per square metre.
b. Determine the operating income for each division if the transfer price is $5 per square metre.
c. Since the Raw Materials Division sells all of its sheet metal internally to the Fabrication Division, does the Raw Materials manager care what price is selected? Why? Should the Raw Materials Division be a cost center or a profit center under the circumstances?

Question

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The Answer of Sandra's Sheet Metal Company has two divisions. The Raw Material Division prepares sheet metal at its warehouse facility. The Fabrication Division prepares the cut sheet metal into finished products for the air conditioning industry. No inventories exist in either division at the beginning of 2015. During the year, the Raw Material Division prepared 450,000 square metres of sheet metal at a cost of $1,800,000. All the sheet metal was transferred to the Fabrication Division, where additional operating costs of $1.50 per square metre were incurred. The 450,000 square metres of finished fabricated sheet metal products were sold for $3,875,000.
Required:
a. Determine the operating income for each division if the transfer price from Raw Material to Fabrication is at a cost of $4 per square metre.
b. Determine the operating income for each division if the transfer price is $5 per square metre.
c. Since the Raw Materials Division sells all of its sheet metal internally to the Fabrication Division, does the Raw Materials manager care what price is selected? Why? Should the Raw Materials Division be a cost center or a profit center under the circumstances?

Sandra's Sheet Metal Company Has Two Divisions