Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed

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18.17 Effect of alternative transfer-pricing methods on divisional operating profit.

Sell as raw lumber
Sell as finished lumber
Raw Lumber Division Division revenues
€200
€200
Division variable costs
100 100
Division operating income
€100 €100
Finished Lumber Division Division revenues
€0
€275
Transferred-in costs
–
200
Division variable costs
–
125
Division operating income
€0 €(50) The Raw Lumber Division will maximise divisional operating income by selling raw lumber, which is the action preferred by the company as a whole. The Finished Lumber Division will maximise divisional operating income by not further processing raw lumber which is preferred by the company as a whole.

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
18.17 Effect of alternative transfer-pricing methods on divisional operating profit.
(30 min)

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