Reference no: EM132788499

Problem 1 - The Durango Lumber Company had the following historical accounting data, per 100 board feet, concerning one of its products in the Sawmill Division:

Finished shelving:

Direct materials $60

Direct labor 32

Variable manufacturing overhead 16

Fixed manufacturing overhead 24

The historical data is based on an average volume per period of 20,000 board feet. The shelving is normally transferred internally from the Sawmill Division to the Finishing Division. Durango may also sell the shelving externally for $180 per 100 board feet. The divisions are taxed at identical rates.

Which of the following transfer pricing methods would lead to the highest Finishing Division income if 10,000 board feet are produced and transferred in entirety this period from Sawmill to Finishing?

a. Market price.

b. All variable costs plus 50 percent markup.

c. Full absorption costing plus 10 percent markup.

d. None of these methods generates a higher division income than another.

Problem 2 - Plainfield Company has two divisions: the Mixing Division and Bottling Division. The Mixing Division sells beverage mix to the Bottling Division. Standard costs for the Mixing Division are as follows:

Direct materials $4.00 per gallon

Direct labor 1.60 per gallon

The Mixing Division uses the following predetermined overhead rate:

Variable overhead $2.40 per gallon

Fixed overhead 1.60 per gallon

Total $4.00 per gallon

What is the transfer price for the beverage mix per gallon based on standard absorption cost plus a markup of 30 percent?