Spiro Inc. manufactures wood poles. It has two divisions, Harvesting and Sawing, which are

both evaluated as profit centers. The Harvesting Division is responsible for all the harvesting

operations and transfers logs to the Sawing Division, which transforms the logs into poles for

external customers. Sawing can produce 10,000 poles per year. Both Divisions are currently

producing at full capacity. Upper management has decided to manufacture a higher-demand

wood pole, Pole-S, that can be sold readily.

The manager of the Sawing Division suggests that the maximum price the division can pay for

logs transferred from Harvesting is $61.50 per log. The following information supports this

suggestion:

Price that the external customers are willing to pay for one unit of Pole-S $122.00

Costs per unit:

Direct labour 35.00

Variable overhead 4.50

Fixed overhead 8.50

Direct materials (other than logs) 2.50

Total cost per unit 50.50

Target profit margin 11.00

Total cost and margin 61.50

Maximum transfer price per one log 61.50

The manager of the Harvesting Division disagrees with the proposed transfer price of $61.50.

The division is operating at full capacity and can sell all the logs it produces to external

customers for $75. Moreover, the director says: "for each unit of Pole-S my direct labour cost is

$40.50, variable overhead is $9.50, and fixed overhead is $15. I cannot spend $65 to cut trees

and sell them for $61.50.

REQUIRED:

a) Determine whether it would be beneficial for the company as a whole if logs were transferred

to the Sawing Division at the suggested price of $61.50 per log or sold directly to customers.

Show calculations to substantiate your answer.

b) Calculate the impact of transferring the logs to the Sawing Division at $61.50 on the

performance of each division and explain the effect of this specifically on each manager.

c) Determine the minimum and the maximum transfer price that could be used to account for the

transfer of logs from the Harvesting Division to the Sawing Division. Recommend appropriate transfer price. Justify your recommendation