Transfer-pricing methods, goal congruence. (30 minutes) IlmajokiLumber, Oy, has a Raw Lumber Division and Finished Lumber Division.

The variable costs are:

© Raw Lumber Division: EUR 100 per 100 board-metres of raw lumber

® Finished Lumber Division: EUR 125 per 100 board-metres of finished lumber Assume that there is no scrap incurred in processing raw lumber into finished lumber. Raw lumber can be sold at EUR 200 per 100 boardmetres. Finished lumber can be sold at EUR 275 per 100 board-metres.

REQUIRED 1. Should Umajoki-Lumber process raw lumber into its finished form?

Assume that internal transfers are made at 110% of variable costs. Will each division maximise its contribution to divisional operating profit by adopting the action that is in the best interests of IImajoki-Lumber?
Assume that internal transfers are made at market prices. Will each division maximise its contribution to divisional operating profit by adopting the action that is in the best interests of Ilmajoki-Lumber? kio5