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Question 1 Redstone has two divisions: Mining and Metal. The Mining Division makes aluminium, which is the transferred to the Metals Division. The aluminium is further processed by the Metals division and is sold to customers at a price of 175 per unit. The Mining Division is currently required by Redstone to transfer its total yearly output of 500 000 units of aluminium to the Metals Division at 105% of full manufacturing cost. Unlimited quantities of aluminium can be purchased and sold on the outside market at 85 per unit. To sell the aluminium it produces at 85 per unit on the outside market, the Mining Division would have to incur variable marketing and distribution costs of 5 per unit. Similarly, if the Metals Division purchased aluminium from the outside market, it would have to incur variable purchasing costs of 4 per unit. The following table gives the manufacturing costs per unit in the Mining and Metals Divisions for the year 2016: Mining Division Metals Division Direct materials 15 10 15 281 Direct manufacturing labour costs 18 Manufacturing overhead costs 30* Manufacturing costs per unit *Manufacturing overhead costs in the Mining division are 30% fixed and 70% variable. + Manufacturing overhead costs in the Metals Division are 65% fixed and 35% variable. 63 53 Required (1) Calculate the operating profits for the Mining and Metals Divisions for the 500 000 units of aluminium transferred under each of the following transfer pricing methods: (a) market prices, and (b) 105% of full manufacturing costs. (2) Suppose Redstone rewards each division manager with a bonus calculated as 2% of divisional operating profit (if positive). What is the amount of bonus that will be paid to each division manager under each of the transfer pricing methods in requirement 1? (3) What arguments would Bart Jackson manager of the Mining Division, make to support the transfer- pricing method he prefers? (4) Suppose that the Mining Division is not required to transfer its yearly output of 500,000 units of Aluminium to the Metals Division. From the standpoint of Redstone, as a whole, what quantity of Aluminium should the Mining Division transfer to the Metals Division? (5) Suppose that the Mining Division is not required to transfer its yearly output of 500,000 units of Aluminium to the Metals Division. If each divisional managers is permitted to act autonomously to maximise the division's operating profit, what range of transfer prices will result in managers of the Metals and Mining divisions achieving the actions to be determined to be optimal in requirement 1? Explain your answer. (6) Would you recommend that Redstone allow the divisions to buy and sell Aluminium in the open market, and to negotiate the transfer price between themselves? Explain you answer. Question 1 Redstone has two divisions: Mining and Metal. The Mining Division makes aluminium, which is the transferred to the Metals Division. The aluminium is further processed by the Metals division and is sold to customers at a price of 175 per unit. The Mining Division is currently required by Redstone to transfer its total yearly output of 500 000 units of aluminium to the Metals Division at 105% of full manufacturing cost. Unlimited quantities of aluminium can be purchased and sold on the outside market at 85 per unit. To sell the aluminium it produces at 85 per unit on the outside market, the Mining Division would have to incur variable marketing and distribution costs of 5 per unit. Similarly, if the Metals Division purchased aluminium from the outside market, it would have to incur variable purchasing costs of 4 per unit. The following table gives the manufacturing costs per unit in the Mining and Metals Divisions for the year 2016: Mining Division Metals Division Direct materials 15 10 15 281 Direct manufacturing labour costs 18 Manufacturing overhead costs 30* Manufacturing costs per unit *Manufacturing overhead costs in the Mining division are 30% fixed and 70% variable. + Manufacturing overhead costs in the Metals Division are 65% fixed and 35% variable. 63 53 Required (1) Calculate the operating profits for the Mining and Metals Divisions for the 500 000 units of aluminium transferred under each of the following transfer pricing methods: (a) market prices, and (b) 105% of full manufacturing costs. (2) Suppose Redstone rewards each division manager with a bonus calculated as 2% of divisional operating profit (if positive). What is the amount of bonus that will be paid to each division manager under each of the transfer pricing methods in requirement 1? (3) What arguments would Bart Jackson manager of the Mining Division, make to support the transfer- pricing method he prefers? (4) Suppose that the Mining Division is not required to transfer its yearly output of 500,000 units of Aluminium to the Metals Division. From the standpoint of Redstone, as a whole, what quantity of Aluminium should the Mining Division transfer to the Metals Division? (5) Suppose that the Mining Division is not required to transfer its yearly output of 500,000 units of Aluminium to the Metals Division. If each divisional managers is permitted to act autonomously to maximise the division's operating profit, what range of transfer prices will result in managers of the Metals and Mining divisions achieving the actions to be determined to be optimal in requirement 1? Explain your answer. (6) Would you recommend that Redstone allow the divisions to buy and sell Aluminium in the open market, and to negotiate the transfer price between themselves? Explain you