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Redstone Industrial Resources Company (RIRC) has several divisions. However, only two divisions transfer products to other divisions.

Redstone Industrial Resources Company (RIRC) has several divisions. However, only two divisions transfer products to other divisions. The Mining Division refines toldine, which is then transferred to the Metals Division. The toldine is processed into an alloy by the Metals Division, and the alloy is sold to customers at a price of $450 per unit. The Mining Division is currently required by RIRC to transfer its yearly output of 400,000 units of toldine to the Metals Division at total manufacturing cost plus 10 percent. Unlimited quantities of toldine can be purchased and sold on the open market at $270 per unit. While the Mining Division could sell all the toldine it produces at $270 per unit on the open market, it would incur a variable selling cost of $15 per unit.
Brain Jones, manager of the Mining Division, is unhappy with having to transfer the entire output of toldine to the Metals Division at 110 percent of cost. In a meeting with the management of RIRC, he said, "Why should my division be required to sell toldine to the Metals Division at less than market price? For the year just ended in May, Metals' contribution margin was over $57 million on sales of 400,000 units, while Mining's contribution was just over $15 million on the transfer of the same number of units. My division is subsidizing the profitability of the Metals Division. We should be allowed to charge the market price of toldine when transferring to the Metals Division."
The following table shows the detailed unit cost structure for both Mining and Metals divisions during the most recent year.
         Mining Division Metals Division
Transfer price from Mining Division              -------- $198
Direct Material             $36 18
Direct Labor   48 60
Manufacturing overhead   96 75
Total cost per unit $180 $351
Manufacturing overhead cost in the Mining Division is 25% fixed and 75% variable
Manufacturing overhead cost in the Metals Division is 60% fixed and 40% variable
1. Explain why transfer prices based on total actual costs are not appropriate as the basis for divisional performance measurement.
2. Using the market price as the transfer price, determine the contribution margin for
both the Mining and Metals Divisions.
3. If RIRC were to institute the use of negotiated transfer prices and allowed
divisions to buy and sell on the open market, determine the price range for toldine that would be acceptable to both the Mining and the Metals Divisions. Explain your answer.
4. Use the general transfer-pricing rule to compute the lowest transfer price that would be acceptable to the Mining Division. Is your answer consistent with your conclusion in question 3.
5. Identify which one of the three transfer prices (cost-based, market-based, or negotiated) is most likely to elicit desirable management behavior at RIRC.
See attached file for full problem description.

Redstone Industrial Resources Company (RIRC) has several divisions.
However, only two divisions transfer products to other divisions. The
Mining Division refines toldine, which is then transferred to the Metals
Division. The toldine is processed into an alloy by the Metals Division,
and the alloy is sold to customers at a price of $450 per unit. The
Mining Division is currently required by RIRC to transfer its yearly
output of 400,000 units of toldine to the Metals Division at total
manufacturing cost plus 10 percent. Unlimited quantities of toldine can
be purchased and sold on the open market at $270 per unit. While the
Mining Division could sell all the toldine it produces at $270 per unit
on the open market, it would incur a variable selling cost of $15 per
unit.
Brain Jones, manager of the Mining Division, is unhappy with having to
transfer the entire output of toldine to the Metals Division at 110
percent of cost. In a meeting with the management of RIRC, he said,
“Why should my division be required to sell toldine to the Metals
Division at less than market price? For the year just ended in May,
Metals’ contribution margin was over $57 million on sales of 400,000
units, while Mining’s contribution was just over $15 million on the
transfer of the same number of units. My division is subsidizing the
profitability of the Metals Division. We should be allowed to charge the
market price of toldine when transferring to the Metals Division.”
The following table shows the detailed unit cost structure for both
Mining and Metals divisions during the most recent year.
Mining Division Metals Division
Transfer price from Mining Division -------- $198
Direct Material $36 18
Direct Labor 48 60
Manufacturing overhead 96 75
Total cost per unit $180 $351
Manufacturing overhead cost in the Mining Division is 25% fixed and 75%
variable
Manufacturing overhead cost in the Metals Division is 60% fixed and 40%
variable
Explain why transfer prices based on total actual costs are not
appropriate as the basis for divisional performance measurement.
2. Using the market price as the transfer price, determine the
contribution margin for
both the Mining and Metals Divisions.
3. If RIRC were to institute the use of negotiated transfer prices and
allowed
divisions to buy and sell on the open market, determine the price range
for toldine that would be acceptable to both the Mining and the Metals
Divisions. Explain your answer.
Use the general transfer-pricing rule to compute the lowest transfer
price that would be acceptable to the Mining Division. Is your answer
consistent with your conclusion in question 3.
Identify which one of the three transfer prices (cost-based,
market-based, or negotiated) is most likely to elicit desirable
management behavior at RIRC.

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