Q.2 Sohail 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 Rs.180 per unit. The mining division is currently required by Sohail to transfer its total yearly output of 300,000 units of toldine to the metals division at 120% of full manufacturing cost. Unlimited quantities of toldine can be purchased and sold on the outside market at Rs.90 per unit. The following table gives the manufacturing cost per unit in the mining and metals divisions for 2019:

Manufacturing overhead costs in the mining division are 50% fixed and 50% variable. Manufacturing overhead costs in the metals division are 40% fixed and 60% variable. Required:

1. Calculate the operating incomes for the mining and metals divisions for the 300,000 units of toldine transferred under the following transfer-pricing methods:

(a) market price and (b) 150% of full manufacturing cost.

2. Suppose Sohail rewards each division manager with a bonus, calculated as 0.50% of revenues. What is the amount of bonus that will be paid to each division manager under the transferpricing methods in requirement 1? Which transfer-pricing method will each division manager prefer to use?

Metals Division Mining Division Rs.15 Rs. 6 18 120 Direct material cost Direct manufacturing labor cost Manufacturing overhead cost Total manufacturing cost per unit 32a 25b Rs.65 Rs.51