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

question 65

Essay

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.

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Definitions:

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Compensation levels significantly above the average for comparable positions, typically reflecting high skill levels, experience, or demand.

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