Scala Oil has the following information available regarding its three divisions: production, transportation and refining: Production (crude oil) Transportation (Crude oil) Refining (petrol) Variable costs: $2/barrel (of oil) Variable costs: $1/barrel Variable costs: $8/barrel Fixed costs: $6/barrel Full Cost: $8/barrel Fixed costs: $3/barrel Full Cost: $4/barrel Fixed costs: $6/barrel Full Cost: $14/barrel The division sells to the transport division. The external market will pay $13 a barrel. The division buys from the production division and sells to the refining division; the market price is $18 a barrel The external market will pay $52 a barrel. It refines at a rate of 2 barrels of crude oil to 1 barrel of petrol. a For an output of 100 barrels of crude oil, produce profit statements indicating revenues, total costs including transferred in costs and profits for each division using: iii) negotiated prices (from production to transport at $10 a barrel and from transport to refining at $16.75 a barrel) b. Advise the Directors of the advantages and disadvantages of the following transfer pricing practices: i) marketpricetransfers ii) costplustransfers iii)negotiatedpricetransfer
Scala Oil has the following information available regarding its three divisions: production, transportation and refining: Production (crude oil) Transportation (Crude oil) Refining (petrol) Variable costs: $2/barrel (of oil) Variable costs: $1/barrel Variable costs: $8/barrel Fixed costs: $6/barrel Full Cost: $8/barrel Fixed costs: $3/barrel Full Cost: $4/barrel Fixed costs: $6/barrel Full Cost: $14/barrel The division sells to the transport division. The external market will pay $13 a barrel. The division buys from the production division and sells to the refining division; the market price is $18 a barrel The external market will pay $52 a barrel. It refines at a rate of 2 barrels of crude oil to 1 barrel of petrol. a For an output of 100 barrels of crude oil, produce profit statements indicating revenues, total costs including transferred in costs and profits for each division using: iii) negotiated prices (from production to transport at $10 a barrel and from transport to refining at $16.75 a barrel) b. Advise the Directors of the advantages and disadvantages of the following transfer pricing practices: i) marketpricetransfers ii) costplustransfers iii)negotiatedpricetransfer
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Scala Oil has the following information available regarding its three divisions: production, transportation and refining:
| Production (crude oil) | Transportation (Crude oil) | Refining (petrol) |
| Variable costs: $2/barrel (of oil) | Variable costs: $1/barrel | Variable costs: $8/barrel |
| Fixed costs: $6/barrel Full Cost: $8/barrel | Fixed costs: $3/barrel Full Cost: $4/barrel | Fixed costs: $6/barrel Full Cost: $14/barrel |
| The division sells to the transport division. The external market will pay $13 a barrel. | The division buys from the production division and sells to the refining division; the market price is $18 a barrel | The external market will pay $52 a barrel. It refines at a rate of 2 barrels of crude oil to 1 barrel of petrol. |
a
For an output of 100 barrels of crude oil, produce profit statements indicating revenues, total costs including transferred in costs and profits for each division using:
iii) negotiated prices (from production to transport at $10 a barrel and from transport to refining at $16.75 a barrel)
b.
Advise the Directors of the advantages and disadvantages of the following transfer pricing practices:
i) marketpricetransfers
ii) costplustransfers
iii)negotiatedpricetransfers
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