Question :

Brown's Mill has two working units, each of which is supposed an investment center for estimate 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. Through the most current year, the Cutting Division produced 120,000 cords of wood, at a net cost of $1,320,000.

The whole output was transferred to the Assembly Division, where extra 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. Evaluate 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. Evaluate the operating income for every 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? Could the Cutting Division in this case be considered a cost center or a investment/ profit center?