Pharoah Inc. manufactures wood poles. Pharoah Inc. has two responsibility centres, harvesting and sawing, which are both evaluated as profit centres. The harvesting division does all the harvesting operations and transfers logs to the sawing division, which converts the wood into poles for external clients. When operating at full capacity, the sawing division can convert 11,600 poles. Management is considering replacing this type of wood pole with another type of wood pole that can be sold at a lower price and could allow the firm to operate at full capacity all the time. The director of the sawing division suggested that the maximum price the division can pay for each log from harvesting is $30.40. Following is the information that supports this suggestion: Price per pole that the client would pay Direct labour costs Variable overhead costs Fixed overhead costs Raw material costs (other than logs) Profit margin Total costs and profit margin Maximum price for a log $35.00 4.40 8.80 2.40 50.60 12.00 $93.00 62.60 $30.40
Pharoah Inc. manufactures wood poles. Pharoah Inc. has two responsibility centres, harvesting and sawing, which are both evaluated as profit centres. The harvesting division does all the harvesting operations and transfers logs to the sawing division, which converts the wood into poles for external clients. When operating at full capacity, the sawing division can convert 11,600 poles. Management is considering replacing this type of wood pole with another type of wood pole that can be sold at a lower price and could allow the firm to operate at full capacity all the time. The director of the sawing division suggested that the maximum price the division can pay for each log from harvesting is $30.40. Following is the information that supports this suggestion: Price per pole that the client would pay Direct labour costs Variable overhead costs Fixed overhead costs Raw material costs (other than logs) Profit margin Total costs and profit margin Maximum price for a log $35.00 4.40 8.80 2.40 50.60 12.00 $93.00 62.60 $30.40
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Pharoah Inc. manufactures wood poles. Pharoah Inc. has two responsibility centres, harvesting
and sawing, which are both evaluated as profit centres. The harvesting division does all the
harvesting operations and transfers logs to the sawing division, which converts the wood into
poles for external clients. When operating at full capacity, the sawing division can convert
11,600 poles. Management is considering replacing this type of wood pole with another type
of wood pole that can be sold at a lower price and could allow the firm to operate at full
capacity all the time.
The director of the sawing division suggested that the maximum price the division can pay for
each log from harvesting is $30.40. Following is the information that supports this suggestion:
Price per pole that the client would pay
Direct labour costs
Variable overhead costs
Fixed overhead costs
Raw material costs (other than logs)
Profit margin
Total costs and profit margin
Maximum price for a log
$35.00
4.40
8.80
2.40
50.60
12.00
$93.00
62.60
$30.40
Transcribed Image Text:The director of the harvesting division disagrees with selling the logs at a price of $30.40. The
division is operating at full capacity and sells logs to external clients for $45.00. Moreover, the
director says, "My direct labour costs are $23.90, my variable overhead costs are $4.70, and
my fixed overhead costs are $9.60. I can't cut trees for $38.20 and sell them for $30.40."
Assuming production is at full capacity, determine whether Pharoah Inc., as a whole,
would make a higher profit if logs were transferred to the sawing division for $30.40 per
log.
Contribution margin from selling logs
Contribution margin from selling poles
It would be
Show Transcribed Text
Minimum transfer price
for
Maximum transfer price
$
$
Pharoah
Appropriate transfer price $
ů
Calculate the minimum and maximum transfer prices that could be used, and recommend
an appropriate transfer price. (Round answers to 2 decimal places, e.g. 15.25.)
$
$
Inc., to transfer the logs at $30.40
c
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