Question No. 5

Table Rock Quarry and Stone operate a mining operation and a processing operation that makes the rough sandstone into building blocks. The sandstone can be sold in large blocks by the pound or further manufactured into stone blocks for building. Below are the respective selling prices and related costs.

Mining Processing

Sales Price Per Ton $5,000 $12,000

Variable Cost Per Ton $2,000 $3,000

Fixed Cost Per Ton $1,000 $4,00

Required:

Compute the operating income for each division using sales price as the transfer price.

Compute the operating income for each division using variable cost as the transfer price.

List at least two other transfer pricing methods.

Discuss the pros and cons of three methods.