21 22 EFFECT OF ALTERNATIVE TRANSFER PRICING METHODS ON DIVISION OPERATING INCOME (CMA, adapted) Ajax Corporation has two divisions The mining division makes toldine, which is then transferred to the metals division The toldine 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 Ajax to transfer its total yearly output of 200,000 units of toldine to the metals division at 110 of full manufacturing cost Unlimited quantities of toldine can be purchased and sold on the outside market at $90 per unit LO 2 1 Method A Division Operating Income is $1,800,000 The following table gives the manufacturing cost per unit in the mining and metals divisions for 2017 Mining Division Metals Division 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 Direct material cost $12 $ 6 Direct manufacturing labour cost 16 20 Manufacturing overhead cost 32 a 25 b Total manufacturing cost per unit $60 $51 Required Calculate the operating incomes for the mining and metals divisions for the 200,000 units of toldine transferred under the following transfer pricing methods (a) market price and (b) 110 of full manufacturing cost Suppose Ajax rewards each division manager with a bonus, calculated as 1 of division operating income (if positive) What is the amount of bonus that will be paid to each division manager under the transfer pricing methods in requirement 1 Which transfer pricing method will each division manager prefer to use What arguments would Brian Jones, manager of the mining division, make to support the transfer pricing method that he prefers

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21-22 EFFECT OF ALTERNATIVE TRANSFER-PRICING METHODS ON DIVISION OPERATING INCOME. (CMA, adapted) Ajax Corporation has two divisions. The mining division makes toldine, which is then

21-22 EFFECT OF ALTERNATIVE TRANSFER-PRICING METHODS ON DIVISION OPERATING INCOME. (CMA, adapted) Ajax Corporation has two divisions. The mining division makes toldine, which is then transferred to the metals division. The toldine 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 Ajax to transfer its total yearly output of 200,000 units of toldine to the metals division at 110% of full manufacturing cost. Unlimited quantities of toldine can be purchased and sold on the outside market at $90 per unit.

LO 2

1. Method A Division Operating Income is $1,800,000

The following table gives the manufacturing cost per unit in the mining and metals divisions for 2017:

	Mining Division	Metals Division
^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.
Direct material cost	$12	$ 6
Direct manufacturing labour cost	16	20
Manufacturing overhead cost	32^{^a}	25^{^b}
Total manufacturing cost per unit	$60	$51

Required

Calculate the operating incomes for the mining and metals divisions for the 200,000 units of toldine transferred under the following transfer-pricing methods: (a) market price and (b) 110% of full manufacturing cost.
Suppose Ajax rewards each division manager with a bonus, calculated as 1% of division operating income (if positive). What is the amount of bonus that will be paid to each division manager under the transfer-pricing methods in requirement 1? Which transfer-pricing method will each division manager prefer to use?
What arguments would Brian Jones, manager of the mining division, make to support the transfer-pricing method that he prefers?