The Mill Flow Company Has Two Divisions

question 99

Essay

The Mill Flow Company has two divisions. The Cutting Division prepares timber at its sawmills. The Assembly Division prepares the cut lumber into finished wood for the furniture industry. No inventories exist in either division at the beginning of the year. During the year, the Cutting Division prepared 60,000 cords of wood at a cost of $660,000. All the lumber was transferred to the Assembly Division, where additional operating costs of $6 per cord were incurred. The 600,000 boardfeet of finished wood were sold for $2,500,000.
Required:
a. Determine the operating income for each division if the transfer price from Cutting to Assembly is at cost - $11 a cord.
b. Determine the operating income for each division if the transfer price is $9 per cord.
c. Since the Cutting Division sells all of its wood internally to the Assembly Division, does the manager care what price is selected? Why? Should the Cutting Division be a cost centre or a profit centre under the circumstances?

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Definitions:

Presbycusis

The loss of hearing that gradually occurs as individuals age, affecting the ability to perceive or understand sounds.

Otosclerosis

A disease of the bones of the middle and inner ear leading to hearing loss when these bones grow abnormally and become fixed together.

Meniere's Disease

A disorder of the inner ear causing vertigo, hearing loss, and ringing in the ear (tinnitus), typically affecting one ear.

Ear Ossicles

Three tiny bones called the malleus, the incus, and the stapes located in the middle ear cavity. They are the smallest bones of the body.