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Metals Division, external SP$/$unit $=$

$$150\mathrm{.}00$

Annual output of mining division $=$

$400,000$ units

External market price, unit of toldine $=$

$$90\mathrm{.}00$

Add'l cost per unit on external transfers $=$

$$5\mathrm{.}00$

Required:

As a financial analyst, prepare a report for Ajax's senior management which addresses the

quantitative and qualitative aspects of the different pricing approaches the company could use to

transfer toldine between the two divisions and the impact on divisional managers getting their

annual bonus. Recommend an approach that would be most likely to elicit desirable

management behavior at Ajax, allow both divisional management to achieve their bonus and thus

benefit the company overall.how to do case analysis for the question below Ajax Consolidated Case

Ajax Consolidated has several divisions; however, only two of its divisions transfer products to

other divisions. The mining division refines toldine, which it transfers to the metals division

where toldine is processed into an alloy and is sold to customers for $$150$ per unit. Ajax currently

requires the mining division to transfer its total annual output of $400,000$ units of toldine to the

metals division at total $($actual$)$ manufacturing cost plus $10\%.$ Unlimited quantities of toldine can

be purchased and sold on the open market at $$90$ per unit. The mining division could sell all the

toldine it produces at $$90$ per unit on the open market, but it would incur a variable selling cost

of $$5$ per unit. To achieve a bonus, divisional managers need to exceed a ROI $($return on

investment defined as assets$)$ of $10\%.$ The mining division has assets of $$75$ million and the

metals division has assets of $$70$ million.

Brian Jones, the mining division's manager, is unhappy transferring the entire output of toldine

to the metals division at $110\%$ of cost$.$ In a meeting with Ajax management, he said, "Why

should my division be required to sell toldine to the metals division at less than market price?

For the year just ended in May, the contribution margin on metals was more than $$19$ million on

sales of $400,000$ units while the mining division's contribution was just over $$5$ million on the

transfer of the same number of units. My division is subsidizing the profitability of the metals

division. We should be allowed to charge the market price for toldine when we transfer it to the

metals division."

The following is the detailed unit cost structure for both the mining and metals divisions for the

fiscal year ended May $31,2022$:

Manufacturing overhead in the mining division is $25$ percent fixed and $75$ percent variable.

$$ Manufacturing overhead in the metals division is $60$ percent fixed and $40$ percent variable.

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