Answer:
A. Cutting Assembly
Operating income $ 0 $1,480,000
B. Cutting Assembly
Operating income ($120,000) $1,600,000
C. Yes, the manager does care what price is selected becausethe manager what to know whether it is either cost center or profit center
Cutting Division should be a COST CENTER
Explanation:
a. Calculation to Determine the operating income for each division if the transfer price from Cutting to Assembly is at cost - $11 a cord.
CUTTING ASSEMBLY
Revenue $660,000 $2,500,000
Cost of services:
Incurred $ 660,000 $ 360,000
(60,000*$11=$660,000)
(60,000*$6=$360,000)
Transferred-in $0 $660,000
Total Cost $ 660,000 $1,020,000
($660,000+$0=$660,000)
($360,000+$660,000=$1,020,000)
Operating income $ 0 $1,480,000
($660,000-$660,000=$0)
($2,500,000-$1,020,000=$1,480,000)
Therefore the operating income for each division if the transfer price from Cutting to Assembly is at cost - $11 a cord will be :
Cutting Assembly
Operating income $ 0 $1,480,000
b. Calculation to determine the operating income for each division if the transfer price is $9 per cord.
CUTTING ASSEMBLY
Revenue $540,000 $2,500,000
(60,000*$9=$540,000)
Cost of services:
Incurred $660,000 $360,000
(60,000*$11=$660,000)
(60,000*$6=$360,000)
Transferred-in $0 $540,000
(60,000*$9=$540,000)
Total Cost
$660,000 $900,000
($660,000+$0=$660,000)
($360,000+$540,000=$900,000)
Operating income ($120,000) $1,600,000
($540,000-$660,000=$120,000)
($2,500,000-$900,000=$1,600,000)
Therefore the operating income for each division if the transfer price is $9 per cord will be :
Cutting Assembly
Operating income ($120,000) $1,600,000
c. Yes, Based on the above calculation for both (a) and (b) in a situation where the Cutting Division sold all of its wood internally to the Assembly Division, the manager does care about what price is selected reason been that the manager what to know whether it is either cost center or profit center when carrying out performance evaluation.
Based on the above calculation Under the circumstances the Cutting Division should be a COST CENTER.
