Allied Resources Company (ARC) has two divisions: Mining and Metals. The Mining Division extracts iron ore from
its site in Western Australia, at a standard variable production cost of $70 per tonne. The iron ore is then transferred to the Metals Division, where the iron is processed into steel at an additional standard variable production cost of $90. The steel is sold to customers at $320 per tonne. While the Mining Division can sell its iron ore at $120 per tonne on the open market, it would also incur a variable selling cost of $5 per tonne. Required:
(a) Assume that the Mining Division has spare capacity. Calculate the transfer price using the general rule.
(b) Assume that the Mining Division has no spare capacity. Calculate the transfer price using the general rule.
(c) Assume that the Mining Division has no spare capacity. Calculate the transfer price if it is based on standard variable production cost plus a 30% markup. Is it likely that the internal transfer will take place? Support your answer with incremental analysis for both internal transfer and external sales for the Mining Division.
(d) Assume that the Mining Division has limited spare capacity and can only supply part of the required 5,000 tonnes of iron ore to Metals Division. To supply all of the 5,000 tonnes to the Metals Division, the Mining Division would have to forgo production and sales of 1,000 tonnes of another product to external customers. These external sales typically yield a contribution of $130 per tonne. Use the general rule to calculate the transfer price per tonne. (2 marks)
(e) Assume that both divisions have spare capacity. The Metals Division has been approached by a construction company with a special order for 500 tonnes of steel at $290 per tonne.
(i) Is this offer in the best interests of the company as a whole? Why?
(ii) What range of transfer price of iron ore would be acceptable to both divisions?
(iii) Calculate the contribution margin per tonne resulted from the special order for each division and for the company, if the transfer price is $150 per tonne.
Can someone explain it when you have a time.
a). Assuming that the Mining Division has spare capacity, it will use that capacity for internal transfers hence the relevant... View the full answer