73) The Eucalypt Forestry 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 2014. 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 boardmetres of finished wood were sold for $2 500



a. Determine the operating profit for each division if the transfer price from Cutting to

Assembly is at cost – $11 a cord.

b. Determine the operating profit 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?



74) Barossa Bicycle Company makes bicycles. The Frame Division manufactures the frames

and the Assembly Division makes the finished bicycles. The frames can be sold separately

for $500. The bicycles sell for $750. The information related to manufacturing for 2014 is as


Frame Division manufacturing costs $12 000 000

Sales of frames by Frame Division 8 000 000

Market value of frames transferred to Assembly 12 000 000

Sales of bicycles by Assembly Division 14 400 000

Additional manufacturing costs of Assembly Division 3 000 000


Calculate the operating profit for each division and the company as a whole. Use market

value as the transfer price. Will all of the managers be happy with this concept? Explain.




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