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?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

---

Definitions:

Fixed Cost Element

The portion of total costs that does not change with the variation in activity level or production volume.

CVP Analysis

Cost-Volume-Profit Analysis, a tool used to determine how changes in costs and volume affect a company's operating income and net income.

Variable

An element, feature, or factor that is likely to vary or change in ways that can affect the outcome of research or experiments.

Fixed

Typically refers to costs or assets that remain constant and do not vary with the level of activity or production.