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Should calgary lumber process raw lumber into finished form

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Qusetion: Transfer-pricing methods, goal congruence. Calgary Lumber has a raw lumber division and a finished lumber division. The variable costs are as follows:

- Raw lumber division: $125 per 100 board-feet of raw lumber

- Finished lumber division: $145 per 100 board-feet of finished lumber Assume that there is no board-feet loss in processing raw lumber into finished lumber. Raw lumber can be sold at $175 per 100 board-feet. Finished lumber can be sold at $345 per 100 board-feet.

1. Should Calgary Lumber process raw lumber into its finished form? Show your calculations.

2. Assume that internal transfers are made at 130% of variable cost. Will each division maximize its division operating-income contribution by adopting the action that is in the best interest of Calgary Lumber as a whole? Explain.

3. Assume that internal transfers are made at market prices. Will each division maximize its division operating-income contribution by adopting the action that is in the best interest of Calgary Lumber as a whole? Explain.

Reference no: EM131672700

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