Question

Problem 9-42A Wood Inc. manufactures wood poles. Wood has two responsibility centres, harvesting and sawing, which are both evaluated as profit centres. The harvesting division does all the harvesting operations and transfers logs to the sawing division, which converts the wood into poles for external clients. When operating at full capacity, the sawing division can convert 12,300 poles. Management is considering replacing this type of wood pole with another type of wood pole that can be sold at a lower price and could allow the firm to operate at full capacity all the time. The director of the sawing division suggested that the maximum price the division can pay for each log from harvesting is $27.60. Following is the information that supports this suggestion: Price per pole that the client would pay $90 Direct labour costs $36.00 Variable overhead costs 5.00 Fixed overhead costs 8.30 Raw material costs (other than logs) 2.10 51.40 Profit margin 11.00 Total costs and profit margin 62.40 Maximum price for a log $27.60 The director of the harvesting division disagrees with selling the logs at a price of $27.60. The division is operating at full capacity and sells logs to external clients for $45.00. Moreover, the director says, “My direct labour costs are $20.20, my variable overhead costs are $4.80, and my fixed overhead costs are $9.90. I can’t cut trees for $34.90 and sell them for $27.60.”

Assuming production is at full capacity, determine whether Wood Inc., as a whole, would make a higher profit if logs were transferred to the sawing division for $27.60 per log. Contribution margin from selling logs $ Contribution margin from selling poles $ It would be not beneficial or beneficial? Answer one. for Wood Inc, to transfer the logs at $27.60.

Calculate the minimum and maximum transfer prices that could be used, and recommend an appropriate transfer price. (Round answers to 2 decimal places, e.g. 15.25.) Minimum transfer price $ Maximum transfer price $ Appropriate transfer price $

Answer 1

Answer with working notes is given below

A Contribution margin from selling logs Contribution margin from selling Poles $246,000 $237,390 Contribution margin from selling Poles -$8,610 Opportunity cost considered It would not be benefit to transfer the logs at $27.60 Since there is opportunity cost of Contribution forgone by doing internal transfer $45.00 Contribution Margin-Selling logs Selling price Variable cost Direct labor variable overhead Total variable cost Contribution per unit Units Total Contribution $20.20 $4.80 $25.00 $20.00 12,300 $246,000 $90.00 Contribution Margin-Selling Poles Selling price Variable cost Transfer price - Logs Direct labor variable overhead Other Raw material cost Total variable cost Contribution per unit Units Total Contribution Less: Opportunity cost Contribution margin $27.60 $36.00 $5.00 $2.10 $70.70 $19.30 12,300 $237,390 $246,000 -$8,610 B Minimum transfer price Variable cost Opportunity cost foregone Minimum transfer price $25.00 $20.00 $45.00 $90.00 Maximum Transfer price Selling price Less; Variable cost Direct labor variable overhead Other Raw material cost Total variable cost Contribution per unit Less: profit margin Maximum Transfer price $36.00 $5.00 $2.10 $43.10 $46.90 $11.00 $35.90 Appropriate transfer price would depend on Operating Capacity If Operating at full capacity $45.00 Variable cost + Contribution Forgone If Spare capacity is available $25.00 Variable cost