The Derwent Omega-3 Oil Company Has Two Divisions

question 64

Essay

The Derwent Omega-3 Oil Company has two divisions.The Fish-oil Division extracts Omega-3 oil from its salmon fishery activities.The Finishing Division converts the oil into natural health products.No inventories exist in either division at the beginning of 2017.During the year,the Fish-oil Division extracted 30 000 litres of oil at a cost of $330 000.All the oil was transferred to the Finishing Division,where additional operating costs of $6 per litre were incurred.The 300 000 litres of finished product were sold for $1 250 000.
Required:
a.Determine the operating profit for each division if the transfer price from Fish-oil to Finishing is at cost - $11 a litre.
b.Determine the operating profit for each division if the transfer price is $9 per litre.
c.Since the Fish-oil Division sells all of its oil internally to the Finishing Division,does the manager care what price is selected? Why? Should the Fish-oil Division be a cost centre or a profit centre under the circumstances?
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Definitions:

Experimental Studies

Research methods involving the manipulation of one variable to determine its effect on another variable in a controlled environment.

Wilhelm Wundt

Often regarded as the father of modern psychology, he established the first psychology laboratory in Leipzig, Germany, in 1879, emphasizing experimental methods.

Mental Processes

The operations of the mind that underlie all thinking, reasoning, perception, and feeling.

William James

A pioneering American psychologist and philosopher who significantly contributed to the development of psychology as a science in the late 19th and early 20th centuries.