Glenelg Sheet Metal Company Has Two Divisions

question 65

Essay

Glenelg Sheet Metal Company has two divisions.The Raw Material Division prepares sheet metal at its warehouse facility.The Fabrication Division prepares the cut sheet metal into finished products for the air conditioning industry.No inventories exist in either division at the beginning of 2017.During the year,the Raw Material Division prepared 450 000 square metres of sheet metal at a cost of $1 800 000.All the sheet metal was transferred to the Fabrication Division where additional operating costs of $1.50 per square metre were incurred.The 450 000 square metres of finished fabricated sheet metal products were sold for $3 875 000.
Required:
a.Determine the operating profit for each division if the transfer price from Raw Material to Fabrication is at a cost of $4 per square metre.
b.Determine the operating profit for each division if the transfer price is $5 per square metre.
c.Since the Raw Materials Division sells all of its sheet metal internally to the Fabrication Division,does the Raw Materials manager care what price is selected? Why? Should the Raw Materials Division be a cost centre or a profit centre under the circumstances?
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Definitions:

Price Elasticity

An indicator of the sensitivity of demand for a product to variations in its price, represented as a percentual change.

Small Percentage

A quantitatively minor proportion or fraction of a total amount, often implying a negligible or minor impact.

Cross-Price Elasticity

An indicator of the variance in the demand for a specific item as a result of fluctuations in the cost of a different product.

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A type of Mexican-inspired dish offered by the Chipotle fast-food chain, consisting of a flour tortilla filled with various ingredients such as meat, beans, rice, vegetables, and sauces.