Please answer all parts accurately and neatly please, Thank you! Part II: Transf

Question

Please answer all parts accurately and neatly please, Thank you!

Part II: Transfer Pricing Pacific Northwest Lumber has two divisions: Raw Lumber and Finished Lumber. The variable costs incurred in each division are as follows: Raw Lumber: VC $15 per 20 feet of raw lumber Finished Lumber: VC $15 per 20 feet of finished lumber Assume that footage of lumber is not lost when raw lumber is processed to finished lumber. Market prices for the products are: $35 for 20 feet of raw lumber $55 for 20 feet of finished lumber Required. Compare the unit contribution margin of raw lumber relative and finished lumber for the firm. Assume internal transfers from the Raw Lumber Division to the Finished Lumber Division are made at 120% of variable costs. Will the Division Manager of Raw Lumber prefer to sell raw lumber externally or transfer to the Finished Lumber Division? What does the division manager of Finished Lumber prefer? Assume both division managers are compensated based on the profitability of their division and, thus, want to maximize their respective division's net income. Assume, instead, that transfers from the Raw Lumber Division to the Finished Lumber Division are made at market prices. Will the Raw Lumber division prefer to sell externally or internally? What will the Finished Lumber division prefer'? a. b. c.

Explanation / Answer

Answer a

Answer b

Transfer price of Raw Lumber = 120% of Variable Cost = 120% of $15 = $18

Since the Raw Lumber division can sell raw lumber outside at $35, the manager of Raw Lumber division will prefer to sell the goods to external market instead of internal transer to Finished Lumber division @ $18 per unit.

Division manager can either take raw lumber from raw lumber division at $ 18 or can purchase from outside market at $35. Since it is cheaper when raw lumber is internally transferred, division manager fof finished lumber would prefer to take raw lumber from raw lumber division at $18

Answer c

Transfer price of Raw Lumber = Market Price = $35

Raw Lumber division will be indifferent between selling the goods internally and selling it externally because under both the alternative selling price is $35 (market price)

Similarly, Finished Lumber division will also be indifferent between purchasing the goods internally or externally because under both the alternative purchase price is $35 (market price)

Raw Lumber Finished Lumber Selling Price               35.00                        55.00 Variable Cost               15.00                        15.00 Cost of Raw Lumber                      -                          15.00 Contribution Margin for the firm               20.00                        25.00

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