Alsation Ltd

question 89

Essay

Alsation Ltd.has two divisions:.The Machining Division prepares the raw materials into component parts, and the Assembly Division assembles the components into finished product.No inventories exist in either division at the beginning of the year.During the year the Machining Division prepared 80,000 square metres of sheet metal at a cost of $480,000.All production was transferred to the Assembly Division where the metal was converted into 80,000 units of finished product at an additional costs of $5 per unit.The 80,000 units were sold for $2,000,000.Required:
a.Determine the operating income for each division if the transfer price from Machining to Assembly is at cost.
b.Determine the operating income for each division if the transfer price is $5/square metre.
c.Since the Machining Division has all of its sales internally to the Assembly Division, does the manager care what price is selected? Why? Should the Machining Division be a cost centre or a profit centre under the circumstances?

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Definitions:

Market Risk

The potential for a loss faced by an investor, which is attributed to elements that influence the total performance of the financial markets.

Firm-specific Risk

The portion of a company's risk that is attributable to its own operations and environment, as opposed to market-wide risk.

Risk-free Asset

An investment with a guaranteed return and no risk of financial loss, often exemplified by government bonds.

Adequately Diversified

A portfolio strategy minimizing risk by investing in a wide variety of assets, ensuring that the performance of one investment does not dramatically impact overall portfolio performance.