Shaw is a lumber company that also manufactures cusiom cabinetry It is made up o

Question

Shaw is a lumber company that also manufactures cusiom cabinetry It is made up of two divisions: Lumber and Cabinetry. The Lumber Division is responsible for harvesing and preparing umber for use, the Cabinetry Division produces custom ordered cabinetry. The lumber produced by the Lumber Division has a variable cost of $2 80 per linear loot and full cost of $3 80 Comparable quality wood sells on the open market for $8.40 per linear foot (Enter your answers to 2 decimal places.) Required: 1. Assume you are the manager of the Cabinetry Division. Determine the maximum amount you would pay for lumber 2. Assume you are the manager of the Lumber Division Determine the minimum amount you would charge for the lumber if you have excess capacity. Repeat assumng you no excess capacity 3. Assume you are the beneficial transfer price assuming there is excess capacity O Type here to ?

Explanation / Answer

Answer 1)

Note : The maximum price that Cabinetry Division willing to pay is the price at which the lumber is available at open market

The maximum price that the manager of Cabinetry division would pay is $8.40

Answer 2)

Note :

Answer 3

Note : when there is excess capacity , the transfer price should be between minimum price that Lumbar division is willing to charge ie $2.80 & maximum price that Cabinetry division is willing to pay ie $ 8.40. In such case the mutually beneficial transfer price must be set at full cost of $3.80 per unit. At this price Lumber division will have contribution of $1per unit & also it can recover the total cost per unit. On the other hand Cabinetry division will save $4.60 ($8.40 -$3.80).

Mutually Beneficial Transfer Price : $3.80

Minimum Price with excess capacity $2.80 Minimum Price without excess capacity $8.40

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