Preparation of Divisional Income Statements. Kumar Farms, near Bombay, India, has two divisions; one produces grain, and the other sells the grain. As soon as the grain is produced, it is transferred to the Selling Division where it is stored in anticipation of future sales at a higher price.

During the year, three grain crops of \(1,900,000\) bushels each were produced. All three have now been sold, although some were held in inventory for various periods of time. The market prices (in rupees) at production time were Rs120 per bushel for the first crop, Rs150 per bushel for the second, and Rs90 per bushel for the third. Assume no beginning inventories.

The annual income statement for the entire company is as follows:

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The company president is very pleased with the total profit but wants to determine whether the price speculation activities of the Selling Division are earning a profit. You are requested to prepare divisional income statements for the Producing Division and the Selling Division. Decide what type of transfer price, market or cost, to use. Explain which transfer price is better. Are the divisional income statements useful? Explain.

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Revenue: Sales (5,700,000 bushels) Cost: Producing Division labor and materials. Rs 130,250,000 Selling Division labor.... Producing Division overhead Selling Division overhead... Total cost Net income.. Rs 1,200,000,000 10,500,000 80,250,000 9,000,000 Rs 230,000,000 Rs 970,000,000