Reference no: EM132639646
BP has two divisions, Refining and Extraction. Each division's costs are provided below:
Extraction: Variable costs per barrel of oil $10
Fixed costs per barrel of oil $8
Refining: Variable costs per barrel of oil $26
Fixed costs per barrel of oil $38
The Refining Division has been operating at a capacity of 40,200 barrels a day and usually purchases 25,100 barrels of oil from the Extraction Division and 15,100 barrels from other suppliers at $64 per barrel.
Question (a) What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 180% variable costs?
Question (b) What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 120% of full costs?
Question (c) Assume 250 barrels are transferred from the Extraction Division to the Refining Division for a transfer price of $22 per barrel. The Refining Division sells the 250 barrels at a price of $200 each to customers. Calculate the operating income earned by each division.
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