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Brown's Mill has two operating units, each of which is considered an investment center for evaluation purposes. The Cutting Division of the mill prepares timber at it's sawmill. Afterwards, the Assembly Division prepares the cut lumber into finished wood, to be sold to furniture manufacturers. During the most recent year, the Cutting Division produced 120,000 cords of wood, at a total cost of $1,320,000. The entire output was transferred to the Assembly Division, where additional costs of $6 per cord were incurred. The 1,200,000 board-feet of finished wood were then sold in the open market for $5,000,000.

Required:

1. Determine the operating income for each division if the transfer price from the Cutting Division to the Assembly Division is set at cost, $11 per cord.

2. Determine the operating income for each division if the transfer price is set at $9 per cord.

3. Since the Cutting Division sells all of its output internally, does the manager care about what price is charged? Why? Should the Cutting Division in this case be considered a cost center or a profit/investment center?

Accounting Basics, Accounting

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