Keep Corporation has two divisions, Refining and Production. The company's primary product is Enkoil Oil. Each division's costs are provided below: Production: Variable costs per barrel of oil $ 3 Fixed costs per barrel of oil $ 2 Refining: Variable costs per barrel of oil $10 Fixed costs per barrel of oil $12 The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other suppliers at $20 per barrel Questions: 1. Assume 200 barrels are transferred from the Production Division to the Refining Division for a transfer price of $6 per barrel. The Refining Division sells the 200 barrels at a price of $40 each to customers. What is the operating income of both divisions together? 2. What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 110% of full costs?
Keep Corporation has two divisions, Refining and Production. The company's primary product is Enkoil Oil. Each division's costs are provided below: Production: Variable costs per barrel of oil $ 3 Fixed costs per barrel of oil $ 2 Refining: Variable costs per barrel of oil $10 Fixed costs per barrel of oil $12 The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other suppliers at $20 per barrel Questions: 1. Assume 200 barrels are transferred from the Production Division to the Refining Division for a transfer price of $6 per barrel. The Refining Division sells the 200 barrels at a price of $40 each to customers. What is the operating income of both divisions together? 2. What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 110% of full costs?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Keep Corporation has two divisions, Refining and Production. The company's primary product is Enkoil Oil. Each division's costs are provided below:
Production:
Variable costs per barrel of oil $ 3
Fixed costs per barrel of oil $ 2
Refining:
Variable costs per barrel of oil $10
Fixed costs per barrel of oil $12
The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other suppliers at $20 per barrel
Production:
Variable costs per barrel of oil $ 3
Fixed costs per barrel of oil $ 2
Refining:
Variable costs per barrel of oil $10
Fixed costs per barrel of oil $12
The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other suppliers at $20 per barrel
Questions:
1. Assume 200 barrels are transferred from the Production Division to the Refining Division for a transfer price of $6 per barrel. The Refining Division sells the 200 barrels at a price of $40 each to customers. What is the operating income of both divisions together?
2. What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 110% of full costs?
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