Question

E10-18 Determining Minimum, Maximum, Negotiated Transfer Prices [LO 10-6] Shaw is a lumber company that also manufactures custom cabinetry. It is made up of two divisions: Lumber and Cabinetry. The Lumber Division is responsible for harvesting and preparing lumber for use; the Cabinetry Division produces custom-ordered cabinetry. The lumber produced by the Lumber Division has a variable cost of $3.00 per linear foot and full cost of $4.00. Comparable quality wood sells on the open market for $9.00 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. ximum Price 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 assuming you have no excess capacity Minimum Price with Excess Capacity Minimum Price without Excess Capacity 3. Assume you are the president of Shaw. Determine a mutually beneficial transfer price assuming there is excess capacity. tually Beneficial Transfer Price

Answer 1

1.the maximum amount would pay for lumber is $9.00, the amount that could purchase the lumber in the open market.

2.the minimum price equals the variable costs, $3.00.If the Lumber Division does not have excess capacity, the minimum price is the selling price in the open market i.e. $9.00.

3. mutually benefit transfer price between the minimum ($3.00) and maximum ($9.00). If it is set at $4.00, the divisions will receive benefits equally from the internal transfer. The selling division makes $3.00 above variable costs ($4.00 - $3.00), whereas the buying division saves $3.00 in the open market price ($9.00 - $4.00)