Pacific Mill Consists of Two Operating Divisions, a Cutting Division

question 86

Essay

Pacific Mill consists of two operating divisions, a Cutting division and the Assembly division. The Cutting division prepares cords of timber at its sawmills, while the Assembly division prepares the cut cords of lumber into board-feet of 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 the cord cost of $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.

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Definitions:

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A psychological state or process of fulfilling one's potential and realizing one’s abilities and qualities to the fullest extent.

Maslow's Model

A theory in psychology proposed by Abraham Maslow, presenting a hierarchy of human needs, from basic physiological needs to self-actualization.

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The driving factors behind individuals' desire to influence, control, or have authority over others or situations.

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