Reference no: EM133018684
Question - Transix Resources Ltd has two divisions: Mining and Metals. The Mining Division extracts iron ore from its site in Western Australia, at a standard variable production cost of $80 per tonne. The Mining Division would incur an additional selling cost of $10 per tonne to sell its iron ore on the open market at $140 per tonne. The iron ore can also be transferred to the Metals Division, where it is processed into steel at an additional standard variable production cost of $100 per tonne. The steel is sold to external customers at $340 per tonne.
Assume that the Mining Division has limited spare capacity and can only supply part of the required 5,000 tonnes of iron ore to the Metals Division. To supply all of the 5,000 tonnes of iron ore to the Metals Division, the Mining Division would have to forgo production and sales of 1,000 tonnes of minerals to external customers. These external sales of minerals typically yield a contribution margin of $90 per tonne. Use the general rule to calculate the transfer price of iron ore per tonne.
Assume that both divisions have spare capacity. The Metals Division has been approached by a construction company with a special order for 500 tonnes of steel at $290 per tonne.
(i) Is this offer in the best interests of the company as a whole? Why?
(ii) Assuming that the transfer price of iron ore is $150 per tonne, calculate the contribution margin per tonne that each division would receive from the special order.
(iii) Calculate the transfer price of iron ore at which the contribution margin from the special order is divided equally between the two divisions.
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