olco Industries is a decentralized company with two divisions: mining and processing. They are both evaluated as profit centres. The mining division transfers raw diamonds to the processing division. The processing division is currently operating at 1 million kg below its capacity, while the mining division is operating at full capacity. The mining division can sell raw diamonds externally at $75 per kilogram. The unit cost of 1 kg of polished diamonds produced by the processing division is as follows:

Raw diamonds

$ 75

Direct materials

10

Direct labour ($20/hour)

30

Variable manufacturing overhead

20

Fixed manufacturing overheada

50

Total unit cost

$185

The processing division has just received an order from International Diamonds Co. for 300,000 kg of polished diamonds at a price of $175 per kilogram. Solco has a policy that prohibits selling any product below total cost. The total cost of a kilogram of raw diamonds in the mining division is $60, of which 25% is company fixed costs.

Instructions

a.

Would Solco as a whole benefit if the raw diamonds were transferred to the processing division at $60 per kilogram to fill the order from International Diamonds? Show all calculations.

b.

Briefly explain whether anything is wrong with Solco's policy that no product should be sold below total cost.

c.

Calculate the minimum and maximum transfer prices that could be used.

d.

Recommend an appropriate transfer price for raw diamonds sold by the mining division to the processing division. Explain your answer.

e.

If the mining division was not operating at full capacity, would your answer in part (d) be different?