Question

3.

Axelia Corporation has two divisions, Refining and Extraction. The company's primary product is Luboil Oil. Each division's costs are provided below: Extraction: Variable costs per barrel of oil $16 Fixed costs per barrel of oil $9 Refining: Variable costs per barrel of oil $26 Fixed costs per barrel of oil $38 The Refining Division has been operating at a capacity of 40,900 barrels a day and usually purchases 25,600 barrels of oil from the Extraction Division and 15,400 barrels from other suppliers at $64 per barrel. Assume 260 barrels are transferred from the Extraction Division to the Refining Division for a transfer price of $26 per barrel. The Refining Division sells the 260 barrels at a price of $220 each to customers. What is the operating income of both divisions together? A. $34,060 B. $50,440 C. $16,380 D. $13,520

Answer 1

Solution Statement showing computation of operating income Particulars Extraction Refining Number of barrels sold (A) 260 260 Sales price per barrel (B) $ 26 $ Total sales revenue (C-AxB) $ 6,760 $ 57,200 220 $ $ 6,760 Total Purchase cost of the material (D) ($26 x 260) Variable cost per barrel (E) Total Variable cost (F=A x E) lo 16 4,160 $ $ 26 6,760 Fixed cost per barrel (G) Total Fixed cost (H=AxG) ulo 9 2.340 $ $ 38 9,880 Net operating Income (C-D-F-H) 260 $ 33,800 Totl Operating income $ 34,060 Conclusion Hence the correct option is A) $34,060