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Culver Consolidated has several divisions, two of which transfer their products to other divisions. The Mining division refines toldine, which it then transfers to
Culver Consolidated has several divisions, two of which transfer their products to other divisions. The Mining division refines toldine, which it then transfers to the Metals division. The Metals division processes the toldine into an alloy and sells it to customers at a price of $155 per barrel. Culver currently requires the Mining division to transfer its total annual output of 417,100 barrels of toldine to the Metals division at total manufacturing cost plus 10%. Unlimited quantities of toldine can be purchased and sold on the open market at $94 per barrel. While the Mining division could sell all the toldine it produces on the open market at $94 per barrel, it would incur a variable selling cost of $5 per unit to do so. Barker Jonas, manager of the Mining division, is unhappy with having to transfer the division's entire output of toldine to the Metals division at 110% of cost. In a meeting with the management of Culver, he protested, "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, Metals' contribution margin was over $21 million on sales of 417,100 barrels, while Mining's contribution on the transfer of the same number of units was just over $5 million. My division is subsidizing the profitability of the Metals division. We should be allowed to charge market price for toldine when we transfer it to the Metals division." Detailed unit costs for both the Mining and Metals divisions follow. Mining Metals Division Division Transfer price from Mining division $66 Direct material $11 8 Direct labor 16 20 Manufacturing overhead 33 24 Total cost per barrel $60 $118 Manufacturing overhead cost in the Mining division is 25% fixed and 75% variable. In the Metals division, it is 60% fixed and 40% variable.
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