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.