=+19-21 KK Effect of different transfer-pricing methods on division operating profit (CMA, adapted)

OBJECTIVES 3, 4 Sampson Ltd has two divisions. The Mining Division makes tolidine, which is then transferred to the Metals Division. The tolidine is further processed by the Metals Division and is sold to customers at a price of $150 per unit. The Mining Division is currently required by Sampson Ltd to transfer its total yearly output of 200000 units of tolidine to the Metals Division at 110% of full manufacturing cost. Unlimited quantities of tolidine can be purchased and sold on the outside market at $90 per unit.

The following table gives the manufacturing cost per unit in the Mining and Metals Divisions for 2014:

Mining Division Metals Division Direct materials cost $12 $6 Direct manufacturing labour cost 16 20 Manufacturing overhead cost 32a 25b Total manufacturing cost per unit $60 $51 a

Manufacturing overhead costs in the Mining Division are 25% fixed and 75% variable.

b Manufacturing overhead costs in the Metals Division are 60% fixed and 40% variable.

Required 1 Calculate the operating profits for the Mining and Metals Divisions for the 200000 units of tolidine transferred under the following transfer-pricing methods:

(a) market price and

(b) 110% of full manufacturing cost.