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Unformatted text preview: 22-19 (30 min.) Transfer-pricing methods, goal congruence.
1. Alternative 1: Sell as raw lumber for $200 per 100 board feet: Revenue Variable costs Contribution margin $200 100 $100 per 100 board feet Alternative 2: Sell as finished lumber for $275 per 100 board feet: Revenue Variable costs: Raw lumber Finished lumber Contribution margin $275 $100 125 225 $ 50 per 100 board feet British Columbia Lumber will maximize its total contribution margin by selling lumber in its raw form. An alternative approach is to examine the incremental revenues and incremental costs in the Finished Lumber Division: Incremental revenues, $275 $200 Incremental costs Incremental loss 2. Transfer price at 110% of variable costs: = $100 + ($100 0.10) = $110 per 100 board feet Sell as Raw Lumber Raw Lumber Division Division revenues Division variable costs Division operating income Finished Lumber Division Division revenues Transferred-in costs Division variable costs Division operating income Sell as Finished Lumber $ 75 125 $ (50) per 100 board feet $200 100 $100 $110 100 $ 10 $ 0 -- 0 $ $275 110 125 $ 40 The Raw Lumber Division will maximize reported division operating income by selling raw lumber, which is the action preferred by the company as a whole. The Finished Lumber Division will maximize division operating income by selling finished lumber, which is contrary to the action preferred by the company as a whole. ...
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