Reference no: EM132967753
Sandhill Industries is a decentralized company with two divisions: mining and processing. They are both evaluated as profit centres. The mining division transfers raw diamonds to the processing division. The processing division is currently operating at 1 million kg below its capacity, while the mining division is operating at full capacity. The mining division can sell raw diamonds externally at $87 per kilogram.
The unit cost of 1 kg of polished diamonds produced by the processing division is as follows:
Raw diamonds $87
Direct materials 18
Direct labour ($20/hour) 38
Variable manufacturing overhead 28
Fixed manufacturing overhead* 52
Total unit cost $223
Based on a capacity of 5.20 million kg per year.
The processing division has just received an order from International Diamonds Co. for 320,000 kg of polished diamonds at a price of $200 per kilogram. Sandhill has a policy that prohibits selling any product below total cost. The total cost of a kilogram of raw diamonds in the mining division is $65, of which 25% is company fixed costs.
Problem 1: Calculate the following for Sandhill. (Round "Variable cost of raw diamonds" answer to 2 decimal places, e.g. 25.35.)
- Variable cost of raw diamonds$
- Contribution margin from selling 320,000 kilograms of raw diamonds$
- Contribution margin from selling 320,000 kilograms of polished diamonds$
Problem 2: Would Sandhill as a whole benefit if the raw diamonds were transferred to the processing division at $65 per kilogram to fill the order from International Diamonds?