Pacific Mill consists of two operating divisions,a Cutting Division and an Assembly Division.The former division prepares timber at its sawmills,while the assembly division prepares the cut lumber into finished wood (which is sold to various furniture manufacturers).During the most recent year the Cutting Division prepared 60,000 cords of wood at a cost of $1,320,000.All of this lumber was transferred to the Assembly Division,where incremental costs of $12 per cord were added.Pacific Mill sold the 600,000 board-feet of finished wood for $5,000,000.
Required:
1.What would the operating income for each of the two divisions be if the transfer price from Cutting to Assembly was set at cost,$22 per cord? (Show calculations. )
2.What would the operating income for each of the two divisions be if the transfer price is set at $18 per cord? (Show calculations. )
3.Since Cutting transfers all of its output internally (to Assembly),does the manager of Cutting care what price is selected? Why? Should Cutting be treated as a cost center under the circumstances (rather than a profit center or investment center)? Explain.

Question

Quizplus · Accepted Answer

Feedback: 11ea6e70_bd7a_1ac3_8f54_2792531edf31_TB1699_00 11ea6e70_bd7a_1ac4_8f54_850838d8d562_TB1699_00 3.The manager of the Cutting Division would care about the transfer price if his/her division was treated as either a profit center or an investment center for performance evaluation purposes.In this particular case,it would seem as if the Cutting Division should probably be treated as a cost center-it is,in essence,a captive supplier to the Assembly Division.We do not know whether the Cutting Division could sell its output on the open market.In the absence of this information,we should probably assume that it cannot.For both reasons,therefore,the Cutting Division should probably be treated as a cost center,and not concern itself about the "profit" it pretends to make by selling to the Assembly Division of the company.

Pacific Mill Consists of Two Operating Divisions,a Cutting Division and an Assembly